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Wage Difference Between Mexico and the United States

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Ross Perot added his memorable "insight" to the debate over the North American Free Trade Agreement (NAFTA) when he warned that passage of NAFTA would create a "giant sucking sound" as U. S. employers shipped jobs to Mexico, where wages are lower than wages in the United States. As it turned out, many U. S. firms chose not to produce in Mexico despite the much lower wages there. Explain why it may not be economically efficient to move production to foreign countries, even ones with substantially lower wages.

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Ross Perot didn't consider the difference in productivity between American and Mexican workers. The US has a much larger supply of capital than Mexico, meaning that American workers are more highly trained and have better ...

Solution Summary

Ross Perot famously claimed that the North American Free Trade Agreement (NAFTA) would create a "giant sucking sound" as U. S. employers shipped jobs to Mexico. This solution uses economic analysis to explain why Perot's "sucking sound" did not in fact occur.

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Consider the economy of United States and Mexico. There are two goods, computer chips and tequila, and two factors of production, skilled and unskilled workers. Computer chips are relatively intensive in skilled labor, and there are no technological differences between both countries. Initially there is no trade.

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