Using the concepts of absolute and comparative advantage answer the questions: W
ID: 1200381 • Letter: U
Question
Using the concepts of absolute and comparative advantage answer the questions:
Why does the U.S. trade goods with other countries that they can produce themselves?
Wouldn’t the U.S. be better off producing the goods themselves?
In your opinion, has the U.S. outsourced too much? Explain why you believe that the U.S. has or has not outsourced too much keeping in mind the reasons why corporations outsource, and the benefits derived from this strategy.
Please review the following resources when forming your opinion; you are free to do as much research as you want however your opinion should be based on data and not assumptions! For example, just because your cousin lost his job because it was sent overseas doesn’t necessarily mean that there was an overall negative economic impact!
Economics of Outsourcing Policy http://www.plu.edu/~econ331/home.html
The Case for Outsourcing Jobs http://money.cnn.com/2012/09/14/news/economy/outsourcing-jobs/index.html
Outsourcing for Dummies (and the Willfully Ignorant)http://www.forbes.com/sites/danikenson/2012/07/11/outsourcing-for-dummies-including-the-willfully-ignorant/#39516eaa6821
US Manufacturers Have Three Million Available Jobs To Fillhttp://www.infowars.com/us-manufacturers-have-three-million-available-jobs-to-fill/
U.S. Trade: Exports and Imports Decline Sharply in January 2009http://www.calculatedriskblog.com/2009/03/us-trade-exports-and-imports-decline.html
Please take a look at how import and exports mirror each other
Explanation / Answer
Outsourcing: This is the process of executing works from abroad suppliers.
Outsourcing increases the scope of bargaining of employers and reduces the scope of bargaining of employees. Since the US-employers have several alternatives of doing works from outside, they might not get interest about US-employees if their rates are high. On the other hand, US-employees may not able to bargain for higher rates, since US-employers already have several alternatives.
Absolute and comparative advantage analysis:
Table of rates
Countries
Rates (suppose in 1 hour)
Banana
Car
Country V
$15
$20
Country US
$20.52
$27.49
Absolute advantage: This is the comparison between two countries, of which one is producing goods more efficiently than other.
Country V has absolute advantage of producing both banana and car, since the rates of production for both these products are lower than the country US.
As per the absolute advantage, country V specializes both for banana and car. Therefore, outsourcing is beneficial.
Comparative advantage: This is the comparison between the two countries, of which one country has lower opportunity cost than other.
Opportunity costs are given below:
Country V
20/15 = 1.33
15/20 = 0.75
Country US
27.49/20.52 = 1.34
20.52/27.49 = 0.75
Country V has the lowest ratio in banana and for the car both countries have the same ratio. Therefore, V has lower opportunity cost and comparative advantage in banana. US should outsource labor for banana from V. In case of car, there is no comparative advantage; but still US should outsource labor for car from V because of uniform labor facility.
Countries
Rates (suppose in 1 hour)
Banana
Car
Country V
$15
$20
Country US
$20.52
$27.49
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