I also know that the wage isnt the only thing that

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Unformatted text preview: matters to you—productivity matters too. So it must be the case that Indian labor is as productive as U.S. labor—but just costs less. I can see why you are doing what you are doing. If I were in your shoes, and had to answer to the stockholders, I would probably do the same thing. So here’s the deal: I will work for the same wage you are paying the software engineers in India. Here is my phone number and e-mail address. I hope to hear from you soon. Signed, Software engineer from Montana But even though e-mails like this one are rarely sent, if the message in the letter is the same message on the minds of enough American software engineers, you can be sure the president of the company is going to hear it. He or she might not 15 (390-427) EMC Chap 15 11/18/05 9:12 AM Page 405 hear it in an e-mail, or on the phone, but he or she will hear it in board meetings. U.S. companies have a monetary incentive to learn what wages they have to pay. If many American software engineers will work for the same wage as Indian engineers, then U.S. companies will be aware of this fact. Then they will hire Americans because often the cost of setting up an operation overseas is expensive and problematic (especially problematic if foreign government issues must be worked out). The Costs of Offshoring Are Easier to See than the Benefits Our economic discussion of offshoring mentions some benefits and costs to offshoring. One huge cost came to the software engineer who ended up earning $700 a week instead of $1,000 a week. Some benefits came in the form of lower prices for consumers. In addition, we learned that offshoring is a two-way street. The biggest practical problem with offshoring is that the costs are much easier to see than the benefits. For this reason, many people come away thinking that offshoring is nothing but costs. Think of yourself watching the TV news one night. A news reporter tells you the story of our software engineer from Montana who went to college and then couldn’t get a job as a software engineer earning $1,000 a week because so many U.S. companies decided to hire Indian software engineers instead. The news report makes the picture easy to see. The software engineer from Montana on your screen is a real person—just like you. If you are an empathic sort of person, you can feel some of the pain and heartbreak that she must be going through. What you don’t see at that moment on television, or perhaps read about in the newspaper the next day, is that just as U.S. companies offshore jobs to India, some foreign companies offshore jobs to the United States. In other words, you don’t see the American who is working for a foreign company. His or her story is rarely told on the TV news. You also don’t see the lower prices that often result from offshoring. As far as you know, prices just keep going up and up and up. So where are the lower prices that offshoring is creating for American buyers? The problem here is that two things are As she shops, why might this American consumer fail to realize that she will be benefiting from the process of offshoring if she decides to make the purchase? Section 1 International Trade 405 15 (390-427) EMC Chap 15 11/18/05 9:12 AM Page 406 happening at the same time, which make it difficult to see what is happening to prices because of offshoring. The first thing that is happening is that the Fed, which we discussed in an earlier chapter, is busy raising the money supply (most months). The increased money supply is putting upward pressure on prices. At the same time, offshoring is putting downward pressure on prices. The problem, however, is that net prices keep rising because the money supply effect pushing prices upward is stronger than the offshoring effect pushing prices downward. It is as if the money supply raises the price of a good $3 at the same time that offshoring lowers the price $1. What will be the end result? It’s going to rise by $2. (Think of a person throwing buckets of water on a fire. The fire still flames, but not by as much as it would if no water had been thrown on the water.) If all we can really see are the costs of offshoring, then it is likely that many Americans will rally against it. They might vote for politicians who speak out against it, they might march in the street against U.S. companies that practice it. Would their behavior be different if they saw the whole picture instead of only the cost side of the picture? Defining Terms 1. Define: a. exports b. imports c. balance of trade d. absolute advantage e. comparative advantage f. specialize Reviewing Facts and Concepts 2. Suppose the United States can produce either 90 apples and 20 oranges or 80 apples and 30 oranges. What is the opportunity cost of producing 1 apple? 406 Chapter 15 International Trade and Economic Development QUESTION: I think that if your job were on the line, you would be more antioffshoring than you seem to be. Isn’t it easy for someone to talk about the benefits (to others) of offshoring if he or she is not the one losing a job? ANSWER: You bring up an interesting poi...
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