1) An American is considering relocating their Oregon facility to Nicaragua. The
ID: 1167633 • Letter: 1
Question
1) An American is considering relocating their Oregon facility to Nicaragua. The current exchange rate is 1 U.S. dollar (USD) to 25 Nicaragua Cordobas (NIO). The current wage rate in Nicaragua is 200 NIO per hour, and the U.S. wage rate is $15/hr. If the U.S. facility is predicted to be 2 times more productive than the Nicaragua facility, then waht is the "relative" wage rate (in $/hour) in Nicaragua? Based on (relative) wage rates alone, where should the facility be located?
2) Despite your analysis in Problem !, the same American company from Problem1 still wants to move the facility to Nicaragua (due to other potential benefits outside of the wage rate). To please some of their board members who are concerned about the "relative" wage rate increase, the company is considering investing in training for potential Nicaragua employees to make the "relative" wage rate no worse than the U.S. wage rate of $15/hr. If the U.S. facility can produce 300 units/hr, what productivities (should be range) would allow the Nicaragua "relative" wage rate to be less than or equal to the U.S. wage rate? Use the same exchange rate and wage rate in Nicaragua from Problem 1. (Hint: Thinks U.S. rate > or equal to R, then use equation for R)
Explanation / Answer
Q.1. We have $1 = 24 NIO
wage rate in Nicaragua = 200 NIO / hour
and wage rate in US = $15/hour
If the U.S. facility is predicted to be 2 times more productive than the Nicaragua facility, it implies the units of a product that can be produced in half an hour in US would be produced in one hour in Nicaragua.
thus, Labors required for half an hour in US = Labors required for 1 hour in Nicaragua.
Lets first convert wage rate in Nicaragua in US dollars as follows:
wage rate in nicargua in dollars = 1/24 * 200 = $8.34/hour
wage rate in nicargua in dollars for two hours = 8.34 * 2 = $16.67
as we know production in two hours in nicargua equals production in one hour in US, the wage of 2 hours in nicargua would be compared with wager of 1 hour in US.
By comparing we find out that wage in nicargua for 2 hours is more than wage in US for one hour that gives same level of productivity, thus the facility should be located in US.
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