Macroeconomics Case Study

Comparative Cost Advantage and the American Outsourcing Backlash

OR

Abstract: Offshoring had become a contentious issue during the American Presidential elections. The roots of the controversy sprang from the disparaging growth of jobs in the US despite economic recovery. Proponents of offshoring derived their arguments from the theory of comparative advantage. They believed that it was in America's best interest to take advantage of low cost, skilled labour in countries like India. Studies showed that the net benefit of offshoring was greater to the US and that it helped create rather than destroy jobs in the parent country. Research also pointed out that the major cause of anemic job growth was the productivity gains by American companies and that newer and better paying jobs would soon be created, albeit with some short run friction. Detractors, however, believed that export of service jobs, or offshoring, was the major reason for job losses. They rejected the application of the theory of comparative advantage, as its assumptions of the immobility of labour and capital were not being satisfied in the case of outsourcing.

Pedagogical Objectives:

• To understand the concept of outsourcing – its advantages and disadvantages
• To study the theory of comparative cost advantage
• To understand the real impact of outsourcing on the economy
• To analyse the future of outsourcing in the US economy.

Keywords : Bulletin Board; Insights; Market penetration; Product innovation; Positioning; Traditional research; Customer loyalty