SEA at ASU

1. SEAatASU Student Economics Association Student Economics Association

2. The Student Economics Association at ASU proudly presents a small informational lecture regarding: OUTSOURCING

3. What is Economics? Economics is about the logic of scarcity and choice!!! Economics is not all about money, math, and numbers!!! Money is a medium of exchange and a reasonable standard of measurement; but money is not a resource.

4. ACTIVE ECONOMICS The Role of Government Economics and the Environment Outsourcing

5. Outsourcing: What it is and Is it Really Evil? Outsourcing refers to the transfer of certain internal functions of a company to another entity, such as a subcontractor, which specializes in that operation. Off-shoring, a similar concept, specifically refers to transferring jobs overseas.

6. FREE TRADE ! !

7. Trade is based on a simple,but powerful concept called: Comparative Advantage To demonstrate comparative advantage, we need your help! Let’s divide the class into groups of 3-5. Half of the groups will be “Brazil” and the other half will play “Venezuela” Each nation can then select its president –quickly. If elections appear to proceeding unfairly, or there is a dearth of candidates, we will gladly assist by choosing for you!

8. Nation 1: you are Nation 2: you are Brazil Venezuela You have an no “spoon-making capital”: producing one spoon in Brazil requires use of 6 productive resources. You also a have a primitive pudding-making technology: one pudding cup in Brazil requires use of 12 productive resources. You have some spoon-making capital in your country, producing one spoon in Venezuela requires 4 productive resources. You have very advanced pudding-making technology: to produce one pudding cup in Venezuela requires 2 productive resources. BRAZIL: You are endowed with 120 productive resources. VENEZUELA: You are endowed with 60 productive resources. Here are your production capacities!

9. Things to Keep in Mind: • Pudding Cups and Spoons are of equal value to your global society, that is there is no eating pudding with your fingers! • The leaders of the two nations may NOT converse • There is no endowment of products, YOU must produce them by working out the problem as a group As your individual nations, take a minute to discuss how much of each product you want to produce.

10. Nation 1: you are Nation 2: you are Brazil Venezuela At a cost of 4 productive resources per spoon and 2 productive resourcesper pudding cup, Venezuela’s optimum production output is : __________ Pudding Cups __________ Spoons At a cost of 6 productive resourcesper spoon and 12 productive resources per pudding cup, Brazil’s optimum production output is : __________ Pudding Cups __________ Spoons So our Global Economy has totals of 20 pudding cups and 20 spoons So what did you each produce?! 10 10 10 10

11. But wait! What if we Trade? • We determined individual domestic productions to be 10 pudding cups and 10 spoons each in Venezuela and Brazil – Can this possibly be improved? • Let’s play again, but now the leaders of the two nations MAY converse with each other. As your individual nations, first discuss how much of each product you want to produce, then advise your president what he/she should discuss with the president of the other nation, including how much to exchange and what the exchange rate will be IF you decide to trade.

12. Nation 1: you are Nation 2: you are Brazil Venezuela At a cost of 6 productive resourcesper spoon and 12 productive resources per pudding cup, Brazil’s optimum production output is : __________ Pudding Cups __________ Spoons At a cost of 4 productive resources per spoon and 2 productive resourcesper pudding cup, Venezuela’s optimum production output is : __________ Pudding Cups __________ Spoons So our Global Economy has totals of 30 pudding cups and 30 spoons. Are we better off by specializing? So now what did you produce?! 0 30 30 0

13. Mutual Benefits from Trade • When our two nations had to each produce pudding cups and spoons, each nation ended up with only 10 spoons & 10 pudding cups. • When our two nations traded freely, each one specialized and each nation ended up with 15 spoons and 15 pudding cups. What concept explains this result? How can clutzy Brazil contribute anything to Venezuela’s economy ???

14. Comparative Advantage • Hint: What does pudding cost in Brazil? In Venezuela? • Another Hint: What do spoons cost in Brazil? In Venezuela • Mega Hint: as long as the resource cost ratios are different, mutual benefit from specialization and trade is possible !!!! SIZE and ABSOLUTE advantages are irrelevant.

15. But what gave us Comparative Advantages? • Remember how Venezuela had some spoon-making capital, but awesome pudding technology and Brazil had primitive technologies? • This is what gave each country different relative costs (in productive resource units). When translated into opportunity cost, this ensures that each country must be “better” in producing something! • So, is it safe to say that differences in factor endowments, like natural resources, labor, land, etc., can cause a country to be relatively more efficient in producing one good over the other? • In theory, yes. Now let’s look at some examples and see!

16. West Texas Cotton West Texas Cotton A history of… entrepreneurship innovation research ingenuity… sharecropping company towns Braceros subsidies tariffs quotas

17. West African Cotton West African Cotton Why does West Texas cotton need subsidies and quotas ? ? ? ?

18. Chinese Labor Market: Docile and Desperate

19. Opportunity Cost … down on the farms

20. We know what it is, but is it Evil? • Familiar Phrases: • Every job we send overseas is one less job in America • We are sending money to other countries • We cannot compete with countries whose workers will work for much less “We will, I pledge to you, shut down every loophole, every incentive, every reward for every Benedict Arnold CEO… [who] takes jobs and money overseas at the expense of the American people.”  - John Kerry

21. Costs Benefits AND • To date, the coverage of outsourcing has focused on its perceived costs. This leaves out more than half of the story... • So Let’s recall Comparative Advantage: • If a foreign country can produce a good better and cheaper than we can, it only makes sense that we would buy that good from them so that we can focus on what it is we do best. • Total employment is almost totally a macroeconomic issue and is not significantly affected by the volume of trade. As a NATION, there will never be a net loss of national income. • But if you must dwell on jobs “lost”, you need to think about jobs “gained” as well… GOOD BAD

22. A (true) Example • Delta Airlines sent 1,000 call center jobs to India because the cheaper labor saved them $25 million • 1,000 employees were then laid off • The $25 million in savings enabled Delta to add 1,200 reservation and sales positions in the United States. What if Delta had just pocketed the money? But turn this around.....

23. AnotherExample IBM was criticized for off-shoring 3,000 IT jobs. These reports did not mention their plans to add 4,500 positions to their U.S. payroll. How many of those 4,500 jobs were made available by sending 3,000 overseas?

24. Indirect Benefits The cost savings also allows these companies to offer their services at a lower cost, benefiting all others. This will lead to large societal benefits spread across the economy – but these indirect benefits are hard to see because...

25. From Sea to Shining Sea While the costs are highly concentrated (lost jobs in that specific company), the savings are diffused across the whole economy

26. Is there anInsourcing • Actually …. YES! • The number of U.S. jobs outsourced nearly doubled in the year 2000... • The number of foreign jobs insourced in 2000 nearly tripled! Do we want to give up those jobs?

27. When this is ignored... When we try to prohibit U.S. industries from using resources abroad, we are shooting ourselves in the foot

28. How bad can choice be ???

29. A Moral and Economic Case for Free Trade In the “global economy”, arguments for free trade are as strong as ever. AND it is a moral case as well as an economic one. Anti-trade activists need not disperse, but refocus their efforts on including people (like repressed factory workers in China) in the political process.Shielding them from markets merely denies them economic opportunity.

30. The Student Economics Association at ASU hopes you enjoyed our informational lecture regarding: OUTSOURCING