An Economic Analysis of Outsourcing

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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 ...

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... 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.


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

"Outsourcing in the Developing and Developed World" –

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

"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
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