Sunday, September 21, 2008

Suggested Lesson Plan: Outsourcing

In economics, it often seems we teach students everything about economics they need to know except the basic concepts every taxpayer should know. One area we systematically fail is facilitating a proper understanding of international trade, especially in the area of outsourcing.

Here is a suggested lesson plan for teaching the basic economics of outsourcing.

(1) First, show them this humorous video from The Onion (warning: much cursing, but it is funny).

(2) Then, illustrate that outsourcing cannot destroy jobs.

(2.a) Ask students, "When a firm pays India for outsourcing, it is probably paying them money they would otherwise be spending in the U.S., for the job to be done in the U.S., right?" They will agree.

(2.b) Then ask them, "With what currency do American firms pay with?" They will say the dollar.

(2.c) Then ask them, "What is the only thing an Indian can do with U.S. dollars?" Some may say spend them in the U.S., which is the correct answer. Others may argue that it is traded in a currency exchange market for Rupees. However, the only reason the currency market trades Rupees for dollars is that those dollars can be spent on goods and services in the U.S. The only thing you can ever really do with dollars is spend them on U.S. goods and services (some other countries use the dollar, but they are small countries).

(2.d) Follow this with another question, "Thus, for every $1,000 dollars paid to an Indian firm for outsourcing, how many of those dollars return to be spent in the U.S.?" The answer is all the $1,000 dollars.

(2.e) The final question is, "What is the difference between spending $1,000 in the U.S. or paying $1,000 to another country for a good or service?" The answer is nothing, the $1,000 is ultimately spent in America in both cases. Instead of giving the $1,000 to an American directly, it is given to Americans through the purchase of U.S. exports.

(3) Students love videos, so show them this video containing one of Boone Pickens' commercials explaining his energy plan. At one part in the commercial it says "Over 700 billion dollars are leaving this country to foreign nations every year." Ask the students whether this is true. If they learned the concept, they will reply it is not true, and that all of those dollars had to return to the U.S.. If we paid the money to Saudis, then the only good dollars do for Saudis is to spending it importing American goods and services.

(4) Then, illustrate that outsourcing is just like technological allows us to take on better jobs where we can produce goods and services more efficiently...and greater wealth for all! This amusing and effective video illustrates this perfectly.

Every dollar you spend is spent in America. Either directly to an American, or indirectly in the form of U.S. Exports. The same is true for outsourcing. You can pay an American for work directly, or pay for outsourcing which still pays for American work through higher U.S. exports.