Economics of Outsourcing

Theory

Overview

General Conclusions of our model:

    - Small country case: (cannot affect world prices)
Price of goods stays the same (rel. supply does not change), cost of production falls, firms make profits, more firms enter the industry, L-intensive industry grows (for our particular country case), demand for labor increases, thus creating more jobs and higher wages.

    - Large country case: (can affect world prices)
The process is the same as for a small country, but has additional effects. When the Demand for Labor increases and creates growth in an industry, the relative supply curve shifts. Outsourcing in the import sector has  the effect of improving the terms of trade for the outsourcing country, through effectively creating import-biased growth. 

Analysis  

Figure 4 Click on this link to view the
economic analysis of
outsourcing


This analysis examines a capital-intensive small country which outsources labor-intensive components of its import competing industry.

Sources: Additional Information

See "Globalization and the Open Economy" by Sven W. Arndt.


-by Tyler Hildebrand