International outsourcing- the shifting of service activities from one country to another-was not an issue when...

International outsourcing- the shifting of service activities from one country to another-was not an issue when the factor-price equalization theory was developed. Does the existence of outsourcing change the implications of the theory? justify your answer.

Expert Solution

As per the theorem when two countries merge into one economically and fix the prices of produced goods and services, the factor price also tend to become same in both the nation. However, the very thought behind international outsourcing is to benefit from gap in factor cost i.e. labor and capital. When a company outsources its operations to some other country which have less wage rate the labor cost goes down which economically benefits the company. Same goes for the capital and outsourcing exist to take advantage of this loophole. However, this benefit come into play only when a company shifts to a country where the standard of living below their home country and currency valuations are on their favor.

Rahul Sunny answered 2 years ago

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