The economics of outsourcing

Today, I came across this interesting article in The Economist on a topic that the media debates all the time: outsourcing. Some key points that I liked:

• Outsourcing is based on the same notion as the law of comparative advantage, which states that all countries can raise their living standards though specialization and trade. Even if one country can make everything more cheaply than every other it still gains from focusing on the goods in which its relative advantage is greatest—i.e., in which it has a comparative advantage—and importing the rest.

• Take the example of a poorer, less productive economy, and a richer, more productive one: say, China and America. In the classical model, trade does indeed benefit both economies. Though there are both winners and losers, the winners' gains exceed the losers' losses. Productivity gains in China's export sector raise total wealth in each country.
  

• However, the improvement in productivity in the poor country, such as India or China, can reduce the price of the rich country's exports by enough to make it worse off, despite the increased availability of cheaper goods. It may be that not just some Americans lose, but that the country as a whole is worse off.

• In any event, outsourcing abroad is too small to matter much. One of the most popularly cited estimates, by Forrester Research, is that 3.4m jobs will be outsourced by 2015. That may sound enormous, but it implies an annual outflow of only 0.5% of the jobs in the industries affected. In an average year, the American economy destroys some 30m jobs and creates slightly more, dwarfing the effect of offshoring.

• A number of others jobs will replace those lost to outsourcing. American radiologists need not be condemned to flipping burgers when their work is shipped to Chennai. They can turn their skills to the obesity epidemic, or to the burgeoning field of plastic surgery. There is, surely, more than enough work to be done.