Outsourcing and Trade

682 words | 3 page(s)

Greg Mankiw argues that trade can lower prices, meaning that free “trade lowers the price of a basket of consumer goods for a given price of labor,” in other words, by allowing free trade to occur, the overall total price of the basket of goods is decreased versus the amount of labor that goes into the product (Mankiw, 2007). Outsourcing is the process of obtaining a good or service from a foreign supplier in place of an internal source, typically at a lower cost than that of the internal source. One of the primary fields in which individuals are aware that outsourcing has been occurring for years is within the IT field. Agrawai & Haleem (2013) look at the impact of outsourcing on the overall performance of an IT firm, looking at cost efficiency, productivity, profitability, cash management, growth, market value, and market ratio and compared these numbers to an IT firm that did not outsource. They determined that the firms that outsourced did better in their next four quarter period following their decision to start outsourcing than the firms who opted not to outsource (Agrawai & Haleem, 2013).

The numbers do not lie; the firms were able to expand their profits and productivity in all areas following their decision to outsource their IT departments to other countries. This shows that Mankiw’s argument regarding free trade is correct; that a company is able to benefit exponentially from free trade, especially when free trade is thought of in regards to outsourcing, and of jobs as services provided. The companies are able to provide their specifications and parameters of the type of outsourcing needed, and then start looking abroad, comparing the cost of hiring a company that offers outsourcing versus the cost of maintaining an in house department, in this case an in house IT department. Once they find a company who is able to offer an overall lower total cost, they work on training those individuals to work on their systems, training them on the different issues that they will be dealing with, resolving, and assisting with, and then the company starts to phase out their in house department. First, employees that they want to keep are offered other positions, given the opportunity to either move up or laterally within the company, next, hiring for that department stops. After this, it is simply a matter of either laying off the other individuals, or continuing to decrease the department, writing up and terminating employees for the slightest violation or infraction, keeping to the very letter of the contracts for the employees’ in an at-will employment state, no reason is even needed to fire the employees, they may simply have a job one day and be gone the next. The smart employees will have seen the signs and have already been looking for other jobs, but as outsourcing becomes more and more profitable for larger companies, this reduces the available number of local jobs within that field.

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Mankiw argues that free trade is vital to decreasing the overall cost for the business, and that free trade competition is a good thing, but when another country is able to, unequivocally, offer lower rates than nationally, the national industry starts to dry up, leaving many out of work, or out of a profession. It becomes good for the companies and their bottom line, but the quality of service offered may decrease, and as it steamrolls in a particular industry, national jobs become scarcer. As with all potential arguments, there are positives and negatives to every situation; it becomes a simple case of whether or not a balance may be found between the two, and whether or not it is possible to sustain such a balance while working at the same time to keep costs down in an age of ever increasing inflation.

  • Agrawal, Pushpa, and Abid Haleem. “The Impact Of The Outsourcing Of IT On Firm Performance: An Empirical Study.” International Journal Of Management 30.3 Part 1 (2013): 121-139. Business Source Complete. Web. 29 Nov. 2013.
  • Mankiw, Greg. “On the Other Hand . . . . Rodrik versus Mankiw (Others Also Weigh In).” Economist’s View. Economist’s View, 2007. Web. 29 Nov. 2013. .

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