The macroeconomic implications of outsourcing on trade on the current account - exporter vs. importer

Abstract

This paper highlights outsourcing through examining both parties that are the provider and the buyer. In this study, the major provider of the outsourcing services is considered to be India; and the major buyer of the outsourcing services is considered the United States of America. Two models were build examining each side that are the provider and the buyer. The Model presented throughout the chapter discusses the relationship between macroeconomic variables. The first model presented in this study, shows the relationship between the revenues from outsourcing of Indian IT exports (taken as revenues from IT and BPO exports) and FDI, GDP exports to imports and Inflation. I used the OLS to estimate a linear relationship between the variables. The model used is the OLS, evaluating a linear relationship between the variables. Results were somewhat in line with theory and literature. The second model built in this study, describes the linear relationship between the expenditure spent on outsourcing and the economic variables, mainly Current Account, Unemployment, FDI and GDP. The strongest relationship is that of Expenditure on outsourcing and Unemployment where one percent change in outsourcing expenditure is linked to a 4.1% inverse change in unemployment rates. The increase in expenditure on outsourcing results in a 0.6% direct effect on the current account, almost similar in magnitude (inverse in sign) to the result obtained in the Model of India.