Thread: Article on Outsourcing

[size=-1][color=#cccccc]From the St. Paul Pioneer Press:

Some work just can't be outsourced
EDWARD LOTTERMAN


Sometimes, even the comics contain economics lessons. Last week, an angry Sgt. Snorkel upbraided Beetle Bailey for not digging his foxhole as ordered. Beetle, lolling against a tree, replies, "I'm outsourcing. You have to go to India to see it."

Mercifully, the strip omits what happens next, but clearly Sarge will give Beetle a lesson on the difference between "tradable" and "non-tradable" goods.

The idea is intuitive. Some things, by their very nature, are easy to transport. Steel, lumber, petroleum, wheat, automobiles and TVs are relatively durable items that can be handled cheaply. With little care, they do not deteriorate in transit. Their value is high relative even to the cost of moving them across oceans. Such items are highly "tradable."

Other familiar goods are less tradable. One can transport fluid milk, fresh fish, cut flowers, baked goods and other perishable foods, but only at much higher costs and with a much greater chance that delays will spoil them.

These differences in "tradability" determine how international trade affects different sectors. Some producers of goods or services can be highly affected by increases in trade while firms in other sectors are unaffected.

This relates to an economic principle known as "the law of one price." It said the price of a tradable good in two different locations should not vary by more than the cost of moving that good from the lower-price spot to the higher-price one. If the corn price is $2.40 a bushel in Worthington and $2.80 in Savage and if the cost of trucking corn is only 30 cents, one can earn a dime per bushel moving corn across the state.

Living in Peru 25 years ago, the effects of tradability were often evident. Rice and potatoes were staples in the diets of urban Peruvians. Dry rice is easy to transport and store. Potatoes are perishable and have less value relative to weight and volume than rice.

As the "law of one price" predicted, the wholesale price of rice in Lima never differed much from New Orleans or Bangkok. If the spread widened, grain traders stepped in to take advantage of the opportunity for profit.

Potatoes, however, were considerably cheaper in Peru than in the United States or Europe. Because the cost and risk of transporting them was high compared to their value, potatoes could sell for much less than prices elsewhere without anyone being motivated to make a profit in their trade.

Steel, appliances, autos and so forth were somewhat more expensive than in the United States or Europe. Haircuts in Peru, on the other hand, cost just a fraction of their price in wealthy countries. So did concrete troweling, brick laying and domestic help. All of these services are essentially non-tradable. Low prices in one area cannot practicably motivate any arbitrage.

Fifty years ago, few services were tradable. Modern communication has changed that for insurance claim processing, customer assistance and data entry. But barbers and carpenters will be able to rest easy for a long time.


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