Topic 9: The Myth of Outsourcing's Effect

Watch the economics video Myth: Outsourcing Is Bad for America, then write about how globalization and the economic concept of comparative advantage relate to the practice of outsourcing. In your entry, you should consider the following questions:

• What are globalization, comparative advantage and outsourcing?
• How do globalization and the economic concept of comparative advantage relate to the practice of outsourcing?
• What are the characteristics of an open economy?
• How do production and efficiency relate to outsourcing?
• How do production costs and pricing differ with and without the implementation of outsourcing?
• How does outsourcing relate to the concept of opportunity costs?
• What are the potential differences in the levels of marginal product of labor with and without outsourcing?

• Globalization, in the economic point of view, is the interdependent world economy. Comparative advantage is when one entity (individual or firm, etc.) is able to produce a product or service with less marginal cost compared to others. Outsourcing is any task, operation, job, or process that could be performed by employees within an organization, but is instead contracted to a third party that is usually significantly cheaper for a significant period of time.
• Because some countries have comparative advantage pertaining to labor (cheaper labor), many industries will want to get access to this group of labor. Combined with globalization, these industries are actually able to move their factories to these countries with comparative advantages, thus resulting in outsourcing.
• The characteristics of an open economy include economic activities between domestic community and outside people (and businesses), the ability of people to trade goods and services with other people and businesses in the international community, and the flowing of funds as investment across borders.
• Production and efficiency relate to outsourcing because they are the main reasons why companies and industries outsource: to increase production and maximize efficiency.
• Without the implementation of outsourcing, both the production cost and pricing of the good or service would be higher because of the higher cost of labor. With the implementation of outsourcing, production cost and pricing would both be reduced.
• Outsourcing has many opportunity costs, like any other act of decision, and one of the most controversial opportunity cost is the increase in unemployment within the country that is outsourcing.
• The potential differences in the levels of marginal product of labor with and without outsourcing is that without outsourcing, the marginal product of labor is lower than when there is outsourcing.