There has been an increasing trend towards outsourcing manuf

There has been an increasing trend towards outsourcing manufacturing from the US. In the tennis shoe manufacturing industry, some companies such as New Balance still manufacture some portion of their products in the US despite the opportunity of cheaper offshore manufacturing alternative.   

Suppose the technology in production of tennis shoe is such that labor and capital are substitutable. How does technology affect the production cost of New Balance and its ability to stay competitive in a global market?

What is the likely impact of technological advancement on the relationship between labor and capital (equipment) as factors of production?

Solution

Bettering off technology means capital accumulation will rise. If labour and capital are substitutable then, expansion of tennis shoe can be produced domestically with higher profit and cheaper cost at long-run. Initially cost is higher of domestic production but if outsourcing is restricted then, domestic producers can produce at higher price and trading partners will be restricted from being monopolist in US. Now, if this is done then, domestic producer can produce more and earn more. This will yield higher saving, so that higher investment,capital accumulation and higher profit. Hence, labour can be attracted from other sectors. Again, if technology is upgraded production may exhibit IRS and hence, profit will rise and so as its market. Even higher return from capital accumulation may replace labour and easily absorb higher profit. Hence, initially unemployed labour will get employment.

Initially it will make the production capital intensive but higher return and higher profit will try to expand business and hence, for the forth periods, the unemployed labour will also be employed.