Trading Tasks: A Simple Theory of Offshoring

by Gene M. Grossman, Princeton University and Esteban Rossi-Hansberg, Princeton University
August 2006

This technical economics paper provides background on the economic effects of outsourcing:

Abstract: "For centuries, most international trade involved an exchange of complete goods. But, with recent improvements in transportation and communications technology, it increasingly entails different countries adding value to global supply chains, or what might be called “trade in tasks.” We propose a new conceptualization of the global production process that focuses on tradable tasks and use it to study how falling costs of offshoring affect factor prices in the source country. We identify a productivity effect of task trade that benefits the factor whose tasks are more easily moved offshore. In the light of this effect, reductions in the cost of trading tasks can generate shared gains for all domestic factors, in contrast to the distributional conflict that results from reductions in the cost of trading goods in other neoclassical frameworks."

Read more papers by the economist Gene M. Grossman, including:

"The Rise of Offshoring: It’s Not Wine for Cloth Anymore"

by Gene M. Grossman Princeton University and Esteban Rossi-Hansberg Princeton University, August 2006

Abstract: "If some tasks can be more easily traded than others, the offshoring of tasks produced with a
particular factor is equivalent to technological progress that augments the productivity of that
factor. For example, the effect on low-skill wages of improved opportunities for offshoring
low-skilled tasks is similar to the effect on these wages of improvements in the productivity of
low-skilled workers."