Abstract

Abstract: We analyze the effects of offshoring in a multisector-growth model where sectors differ by TFP-growth and where capital accumulation takes place. Our paper's focus is on the dynamic effects in the country which reallocates a part of its intermediate production to foreign production sites. We show that offshoring induces structural changes and has effects on GDP-growth which are omitted by "standard trade theory". These effects arise only if capital accumulation and demand patterns associated with Baumol's "cost disease" are incorporated into the model. Our model predicts that offshoring slows down the transition from a manufacturing economy to a services economy, which takes place in modern societies, thus having impacts on GDP-growth. A further implication (which is not modeled explicitly in our paper) is that these structural changes may change the "role" of the economy in world trade. That is, the dynamic effects may have impacts on the (quantitative) results of standard trade theory.