An Economic Analysis of Outsourcing

1740 Words4 Pages
bulb-icon

Recommended: Outsourcing advantages and disadvantages

An Economic Analysis of Outsourcing

Outsourcing can be termed as shifting of major functions (production, back office processing and call centers) of a firm from one area to other which in return gets them more profit. Usually large firms base their head offices in developed countries and operate their productions from other developing countries where they can produce the goods at a cheaper cost. One of the main reasons for outsourcing of jobs from US to other developing countries like China and India is the low cost of production due to cheap labor available which in turn reduces the variable costs (6) involved. Some economists look upon it as a threat to US while others think of it as a way for its progress.

The outsourcing of jobs from United States of America is becoming a major threat to the American economy. Despite the substantial benefits of outsourcing, the increase in unemployment and the economy decline causes a major concern to the US government. But economists have cited many points that support outsourcing of jobs based on certain facts. If US companies do not outsource their jobs then foreign firms will produce cheaper goods and sell it to the US market. The demand curve is negatively sloped, so as the price of the substitute goods (3) that are outsourced gets low, the demand for the costlier US goods will come down. The demand curve for this can be said as elastic (5). This paper notes how outsourcing can be said to be as a "progress of the country" or "a major economy break down". China and India are among the major countries that US outsource its jobs.

The outsourcing of jobs from US flourished after the "North American Free Trade Agreement" which moved many jobs in US to Mexico. The wages paid to the ...

... middle of paper ...

... can be considered as a win-win situation (1).

Some economists also mention that a single country cannot monopolize in outsourcing jobs forever. It goes on till there is saturation in their economic growth and then they might loose their monopoly when some other nations come out with a cheaper labor than theirs, then these companies will shift their operations to that side of the world. This keeps going as long as labor becomes cheaper from nation to nation.

Bibliography

"The Whole New World" - The Wall Street Journal – Sep 27 2004

"Outsourcing in the Developing and Developed World" – www.Gigs.org

"Off shoring in the service sector: Economic Impact and Policy Issues" - Knsancityfed.org

"Outsourcing is another word for Progress" - Investor's Business Daily – Sep 16 2004

"Economics Principle and policies"-9th edition – William J. Baumol and Alan S Blinder

Show More
Related

  • Analysis Of Boom Bust, Exodus

    1375 Words  | 3 Pages

    Under this development, foreign companies could set up plants within 100 miles of the United States/Mexico border. These were known as maquiladoras (Broughton 5). Maytag and other manufacturing companies took advantage of this opportunity for the cheap labor, land, resources and thus ability to be more profitable. Maquiladora employment tripled to 1.3 million in 2001, since 1990 (Broughton 142). Maytag’s plant was called Planta III and required less jobs and less skilled labor than what was required in Galesburg. This was good for the company’s bottom line, but bad for employees. The employers had complete control since labor was so easily replaceable. The workers began to be looked at as machines; interchangeable and dispensable and thus were not getting a fair wage. In Mexico the average cost for one week of food was $81 but maquiladora employees would only get paid $36 per week (Broughton 152). Maquiladoras also hurt the local and national Mexican economies. Locals would say that “the only thing maquiladoras have done is occupy the workforce … they don’t resolve any of the problems they generate…overpopulation, lack of social services, school and health care. All of this is what the maquiladoras have brought” (Broughton 153). These companies were simply there to make a profit and provide jobs, not to enrich the employee’s or communities lives. The profits from

    Read More

  • Maquiladoras & NAFTA

    2053 Words  | 5 Pages

    In this paper I will discuss the history and practices of the Maquiladora industry. I will discuss its background, its problems, the benefits it offers to United States companies, and the impact the NAFTA has and will have on the industry. In addition, I will make a suggestion on a possible strategy the Maquiladoras can adopt in order to address the challenges brought on by the NAFTA, to ensure it remains a strong force in the future.

    Read More

  • On How American Companies Started Offshoring White and Blue Collar Positions to Other Countries with Low Pay since the 1960's

    2192 Words  | 5 Pages

    In the 1960’s American Companies started offshoring job positions to Asian countries, and Hispanic countries. American Companies started offshoring American Jobs because their business was more profitable in other countries, so in order for the companies to be closer to those countries American Companies started hiring employees in those countries. Furthermore, as American companies realized how much money they could save by offshoring jobs to other countries with low income they started offshoring more jobs with the purpose of saving money. As American companies offshored white and blue collar positions, their profit incremented and they were able to invest more money in their products. The objectives of this report are the following:

    Read More

  • Outsourcing: Pros and Cons

    527 Words  | 2 Pages

    Mankiw and Swagel (2006) argue outsourcing is not as large a phenomenon as the media describes. Their research indicates outsourcing accounts for very little of job loss in the United States, nor has it made a distinct contribution to the slow rebound of the labor market. They go on to propose that increased overseas employment has actually contributed to higher employment in parent United States companies. They reported that while 30,000 jobs were lost per month in 2004, two million job changes per month were happening as well. They reference the Bureau of Labor Statistics when they report that in 2015 there are expected to be 3.4 million jobs outsourced, but 160 million jobs gained here in the United States. They also claim that there is a rise in net US income by 12-14 cents per dollar of outso...

    Read More

  • The Pros And Cons Of NAFTA

    2266 Words  | 5 Pages

    Some of the consequences of free trade as seen in the case of NAFTA include outsourcing of jobs to other countries, crowding out of domestic industries, poor working conditions among others. NAFTA led to shifts in jobs and production to Mexico as a result of free trade (Villareal & Fergusson, 2015). It has also been blamed for stagnation of wages in the US because of people moving to work in Mexico and Canada and companies also moving there because of the low production costs. According to the centre for Economic and policy research, a surge of imports lead to the US loosing 600,000 jobs in only two decades (Villareal & Fergusson, 2015). In Mexico, the trade is estimated to have put two million workers out of work due to agriculture that is highly subsidized by the US. This then led to increased rates of immigration into the US as people searched for better means of living (Weisbrot et al, 2014). Canada did not suffer any extreme effects as result of NAFTA. However, the productivity gap between itself and the US economy was not closed because its labour productivity remained at 72% as that of US levels (Villareal & Fergusson,

    Read More

  • Outsourcing as a factor in the United States recession

    660 Words  | 2 Pages

    Outsourcing is a complicated and a multifaceted subject that involves a “business[’s] purchase of parts or labor from another company rather than maintaining a sufficient enough number of its own employees to do the same work in the country where the company is already based” ("Outsourcing"). The first practice of outsourcing was in medieval times when “nation-states called in soldiers-for-hire to help their own military forces during ongoing conflicts” ("Outsourcing"). Many think of outsourcing as a one way trade of production facilities moving outside of a companies locale but in actuality it is a two way trade that also involves companies from other areas moving their factories to local areas where conditions are beneficial for the specific business. Outsourcing has evolved but the main idea has remained the same. The recent increase in outsourcing “was initiated by Wall Street pressures on corporations . . . . for increased profits . . . in the production of goods and services marketed in the U.S."(Roberts).

    Read More

  • Outsourcing and the US Labor Market

    1210 Words  | 3 Pages

    Both sides can agree that outsourcing can be desirable for a business do to the potential profit. It allows goods to be made cheaper, management to run smoother, and money to be made faster (Salanţă 270). Both sides can also agree, however, that U.S. jobs are lost as a result of outsourcing (Ahmed 192), as well as environmental damage being cause due to corporations taking advantage of loose environmental regulations (Marquis 39). Upon digging deeper into this debate, one can find that both sides present very convincing arguments.

    Read More

  • Labor in the United States and Outsourcing

    1040 Words  | 3 Pages

    Since the concept of outsourcing was introduced it has been a subject of debate between politicians and citizens of the United States. Remarkably, it was the United States who supported outsourcing and now it is the United States that feels its economic progress is being threatened by outsourcing. One may argue that the financial situations that existed two decades earlier are not the same as they are today, thus the change of time, business priorities of economies have also changed.

    Read More

  • The Outsourcing of American Jobs

    1024 Words  | 3 Pages

    The exporting of American jobs is an issue that is important and will become increasingly so as more and more white collar jobs are shipped overseas. American companies in the past few decades have been sending American jobs overseas paying residents of other countries pennies on the dollar what they had paid American workers to do. This saves the companies millions of dollars on labor costs but costs Americans precious jobs.

    Read More

  • Deregulation And Deindustrialization Essay

    819 Words  | 2 Pages

    Many businesses hire low skilled workers for low wage, but many Americans are not willing to work for low wage. Moreover, many businesses want to keep their costs in a very low price, to achieve the high profit margin. They get their employees from other countries and moving production over the world. Many workers in the United States come from halfway across the world. Low-paid workers are used to produce and export raw material. Companies use cheap raw materials to produce products and invest to other countries with high profits. “People in the south still produced items for export to north--but now they export manufactured food as well as raw materials” (Chomsky 5). The New England was the first one to try out with new business in the U.S. southeast in the beginning of 21th century to find lower cost. “The New England textile industry was one of the first to experiment with plant relocation, shifting its production to the U.S southeast starting at the very beginning of twentieth century in search of lower costs” (Chomsky 5). The relocation program was very successful by the end of the

    Read More

  • Restoring American Competitiveness by Gary P. Pisano and Willy C. Shih

    963 Words  | 2 Pages

    The U.S. industries have been outsourcing manufacturing for several decades now. U.S. companies thought they were reducing costs by outsourcing development, manufacturing, and process-engineering abilities. Consequently, U.S. corporations’ knowledge, skilled workers, and supply chain, which are the necessities to producing advanced products, have vanished. For example, almost all notebook computers, cell phones, and handheld devices, which were once created in the U.S., are now designed in Asia. When a major U.S. company outsource, it pressures their rivals to do the same thing. They also lose the expertise of process engineering, which would interact with manufacturing on a daily basis. Minor companies and skilled workers go to where the jobs and knowledge networks are no matter where they are geographically in the world. This decline of trade in the U.S. has caused a negative chain reaction to their suppliers of sophisticated materials, tools, production equipment, and components. U.S. industries do not have a way of coming up with new ideas for the next generation of high-tech products...

    Read More

  • Illegal Immigration in the United States

    1777 Words  | 4 Pages

    Delgado-Wise, Raul. “The Reshaping of Mexican Labor Exports Under NAFTA.” Center for Migration Studies of New York. 2007. PP 656-674; Academic Search Complete. Web. 14 April 2014.

    Read More

  • The Pros and Cons of Outsourcing

    1607 Words  | 4 Pages

    Outsourcing is shifting all of the costs-accounting costs, including personnel, plus the risk of failure and the responsibility for action-to the third party. In return for assuming costs, the third party benefits by controlling the operation (Coughlan 167). This is the basic definition of what outsourcing is. Outsourcing has been around from the beginning of time. In the movie, ?It Started With the Greeks,? they talk about how the Ionians found out that they could go around the world and find products that people back in their home town would buy. This essentially started the idea of outsourcing since the people who wanted the product was unable to get it but, they were able to have someone else do it for them. Once people knew that they could get anything that they wanted from around the world it lead into consumerism. So once someone got the idea to start and do this full time as a job they were able to outsource anything that they wanted.

    Read More

  • Service based economy in the U.S.

    354 Words  | 1 Pages

    We say that we are heading toward a more global economy because of the fact that competition in today’s markets is global. This means that corporations in the United States can compete in foreign markets and vice versa, therefore U.S. corporations and foreign corporations become interdependent and thrive off each other. This can have a good impact on the United States because it allows U.S. corporations to seek materials and labor outside of the U.S. in countries such as China, India, and Mexico, where workers are paid a lot less money than U.S. workers, thus allowing them to sell their products for significantly cheaper than if they were produced in the U.S.; however, the tradeoff is that many American workers in the industrial sector lose jobs due to this shift of labor to overseas. In the long run this will be beneficial for the U.S. and although some percentage of workers are losing work, new jobs in the services sector, in fields such as computer technology, telecommunications, and language skills are opening up and experiencing growth because of this change.

    Read More

  • Outsourcing Information Security Consultants

    1798 Words  | 4 Pages

    Outsourcing is a technique for companies to reassign specific responsibilities to external entities. There are several motivations for outsourcing including organizational, improvement, cost, and revenue advantages (Ghodeswar & Vaidyanathan, 2008).

    Read More

More about An Economic Analysis of Outsourcing

Open Document