Tuesday, February 01, 2005

Outsourcing skilled labor, part II 

Or, how to keep an economist entertained. My colleague Rich came into the lunchroom and wrote on the blackboard there a question a student asked: Does the increasing trend towards outsourcing cause an increasing divergence of GDP and GNP? Gross Domestic Product measures the production of goods and services for final use within a given geographic location, regardless of ownership of the firm. Gross National Product measures the production of goods and services for final use of all firms of a given country, regardless of the location of production. Toyotas produced in Tennessee are part of GDP but not GNP for the U.S.; they are part of Japan's GNP but not their GDP.

The difference between them is known as net foreign factor income. A country owns its factors of production -- land, labor, capital and entrepreneurial activity. It can use them here or abroad. Goods produced here could be produced by domestic or foreign factors of production. Net foreign factor income is the income of domestic factors earning income abroad less the income of foreign-owned factors earned domestically.

The key word there is "net". For the most part, this difference between GDP and GNP has been miniscule on net, though as a gross it may be rather large. In 2003, we received factor income of $294.4 billion and paid out to foreign firms factor income of $261.1 billion. On net, then, the difference is $33.3 billion out of over $11 trillion in GDP. And as a share of GDP, if anything, the difference has decreased.

What we see more these days is not outsourcing of jobs but an increase in the flow of remittances from workers who immigrate to the U.S. to their home families abroad.

Source: Bureau of Economic Analysis, Dept. of Commerce. That blip down in 1991, by the way, is the payments into the U.S. from our partners for the 1991 Gulf War. While these increased outflows of money are part of globalization, they are not outsourcing of jobs. They are an increase in work here for workers who send money to families abroad, not at all the same thing.