We develop a North-South trade model including the opportunity for outsourcing in a variety expansion framework and derive the effect of an increase in outsourcing on long-run growth. We find that the effect of increased outsourcing on the growth rate of product variety is contingent on the labor size of the Northern and Southern economy. In particular, if the relative labor size of South to North is smaller, outsourcing the production of intermediate goods to Southern economy can have negative effects on economic growth.
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