Offshoring and North-South Trade with Non-homothetic Preferences∗

This paper examines the effect of offshoring in a model of North-South trade when households have non-homothetic preferences of the Matsuyama (2000) type. We presents a platform from which to examine issues of trade and development in the presence of offshoring. The assumption of homotheticity is prevalent throughout the offshoring literature. We find that in equilibrium the South will consume a smaller set of goods than the North, and may produce tasks for goods that it does not consume. Offshoring is likely to cause the South’s relative wage to fall. Faster population growth in the South will cause the South’s relative wage to fall, will shift task production from the North to the South, and will lead the North to consume new goods leading to product cycles. Global and Southern uniform productivity improvements shift the terms of trade against the South, except for the case in which the North and South are completely specialized in different stages of production. Here, the terms of trade are unmoved and both countries will gain. Global and Southern uniform productivity improvements can also lead to product cycles.