Date Published: December 12th, 2014

Manufacturing companies say they will move businesses overseas because of supply and demand problems, but the U.S. government is saying manufacturing companies are not patriotic for moving and outsourcing overseas. Who is right?

To know who is right, let’s begin by asking the question: What is the purpose of doing business? I believe the answer is to make “profit,” with exceptions to Non–Profit or charitable organizations.
We can use the basis of economics with some simple economics models to see who is right and come up with some possible corrective measures as recommendations or suggestive “economic advice.” In my view, based on economics studies and situation analysis, the problem between the manufacturing companies and government is based on their claims around the world, and particularly in the Western and European countries due to the downturn or imbalance of the economy–(Which is the cause of both claims). These situations are sometimes known as economic stagnation. Economic stagnation is a prolonged period of slow economic growth, traditionally measured in terms of the GDP growth. The potential growth is estimated in percentages by experts in macroeconomics studies.
The best ways to approach problem solving issues or situations is to look at the underlying causes and not the immediate causes, based on the claims or actions that caused or made something to happen. To give a clear answer and understanding to both manufacturing companies and government’s claims, I would start by giving some distinctions between macroeconomics and microeconomics studies.
What is Macroeconomics? Macroeconomics is the study of the whole economy, including the study of inflation, unemployment, economic growth, and the business cycle. Microeconomics is the study of the economic actions of individuals, including individual households and individual firms. For example, while microeconomics studies how demand and supply determines a good’s price, macroeconomics studies what determines the price level of all goods. While microeconomics studies how many workers a firm employs, macroeconomics study how many workers an economy employs. Macroeconomics also studies economic growth.
Let’s get back to the question and answer: What is the purpose of doing business? If an investor’s purpose of doing business is to make “profit,” then let’s start with the manufacturing company’s claims of the demand and supply problems. Manufacturing companies are concerned with corporate prosperity from product developing to launching. New product development is one of the riskiest, yet most important, endeavors of Modern Corporation. Certainly the risk is high: you and your colleagues have all seen large amounts of money spent on new products then disasters happen in your own firms or industries, but then so too are the rewards. However, from a business perspective, it’s a win-loss situation depending on the manufacturing strategy, principles and concepts, marketing strategy and concepts, and where you are doing business. Manufacturing, from functional strategies are developed independently of one another and the corporate as a whole, beginning from research and development, product design/engineering, manufacturing, marketing, and distribution. The manufacturing process from developing new products to the market launching entails a lot of costs. For example: the cost of raw materials, manufacturing overhead, labor cost – wages and salaries, administrative, etc., plus corporate taxes, which are high in some Western and Europeans countries. We know that, microeconomics is the study of the economic actions of individuals, including individual households and individual firms, also microeconomics studies how demand and supply determine a good’s price, and this is what the manufacturing companies are concerned with more to achieve the benefits from their business - “profit,” though they care about macroeconomics as well.
However the argument of manufacturing companies is that how can they continue to do business in a country where the economy is not operating at its potential level that is full employment? At full employment, some unemployment occurs. This is consistent with the shifting of workers between jobs to changing tastes and technology, and since microeconomics studies how demand and supply determines a good’s price, consequently, manufacturing companies are willing to produce more goods and supplies at a higher price in the market when consumers are willing to buy the goods. But since household incomes have dropped because of the recession and the unemployment is high, with the GDP falling significantly below its full employment level, consumer aggregate spending would reduce, as well as demand for goods, consequently manufacturing. Companies would not be able to produce more goods to supply in the market nor would the manufacturer like to produce goods endlessly and store them in the warehouses and tie down the working capital in its stock inventories, with business operating costs including other business expenses and run their businesses at a loss.
However, recession occurs when real GDP declines for two consecutive quarters. Two types of recession occur. First, output can fall if the economy is operating at below its potential (full-employment) level. Second, output can fall if the economy’s potential level of output falls. The first type of recession occurs when output falls significantly below its full employment level in a recession. Unemployment grows as a large number of workers cannot find work. The second type of recession occurs when economy’s potential outputs falls. The most dramatic recession of this type in the nation’s history being the U.S., was during the Great Depression, where 25 percent of the workforce was unemployed and the real output fell more that 30 percent. This type of recess usually occurs when consumers and investors reduce their aggregate spending.
To address both manufacturing companies and government claims, let’s start with the law of supply and demand. Law of Demand states: Quantity demanded and prices are inversely related, and more in demand at a lower price, less at a higher prices (other things being equal).
Law of supply: Quantity supplied and price is directly related, more is supplied at a higher price, less at a lower price (other things being equal).

Quantity Demanded: is maximum quantity of a good that buyers are willing to buy at a given price (over a fixed period of time).
Quantity Supplied: is maximum quantity of a good that sellers are willing to supply at a given price (over a fixed period of time).

From my perspective, corporate manufacturing companies move their businesses overseas where they can pay less corporate taxes, experience low cost on labor, manufacturing overhead and other business related costs and make profit. But it’s a game of win-loss situations. Going overseas to do business, there are benefits of entering foreign markets, and some of the benefits are: Exploiting comparative advantages-Marketing Theory, meaning that they exchange goods and services in which they have a relative advantage, increase in sales, leverage strengths, achieve a competitive edge, tax advantage, prolong product life, and increase in profits. However, there are also environmental hurdles in attempting to enter foreign markets and grow in international markets such as: Political and legal influences, economic/demographic influences, social/cultural factors, technology, and control problems. So one can see that going overseas is not that easy, and hoping that the business would be better off. A lot of research study needs to be done before entering a foreign market, and marketing research is a continued process for the business to succeed. The same applies to manufacturing companies that are engaged in channels of distributions market. Though their manufactured products may enter the market through the channel of distribution and eventual to end user/consumer, these types of manufacturing companies which are indirect channels, encounter the same difficulties, and also have to conduct market researches and ongoing training processes and monitoring of the distributors to be successful. Most successful manufacturing companies that engage in channels of distributions have a director of channel of distributions responsible for overseeing the distribution channels, working effectively, conducting the training and monitoring the distributors.
On the other hand, Fiscal Policy, Government Spending and Taxation are some of the main guides for any government to follow particularly when the economy is in the process of recovery, but slow growth. In economics we have what is known as “Built-in Stabilizers.” Built-in stabilizers are government spending and taxation, which automatically change to offset undesirable changes in GDP, there by reducing the multiplier effects of spending changes, also called automatic stabilizers. The government should watch its spending by cutting on spending and spend money more wisely. Some government spending is equated to money used in providing arms and ammunition to other nations at the expense of the taxpayers, instead of using the money wisely by giving soft loan to more small business sectors to create employment opportunities for the unemployed, reducing corporate taxes to retain manufacturing companies and other firms, and give them little reasons or incentives for going overseas, so they can stay in the country and continue to do business and give more employment opportunities to those in need. For example, tens of thousands of students graduate from colleges and universities every year and have little to no jobs, including them to other individuals also looking for work, makes is all even harder for consumer spending, and so people choose among alternative uses of their scare resources, while on the other hand, manufacturing companies are badly affected in the business world.
In the light of the foregoing, based on the Law of supply and demand, I believe the issues or problem of manufacturing companies moving businesses overseas is due to demand and supply problems, and its not a questions about not being patriotic as claimed by the U.S. government. Here are some corrective measures that the government should take to grow the economy.
The government can reduce Corporate Tax. Give tax breaks to corporate businesses, to discourage them from going overseas, and reduce government spending. Give soft loans say five year loans to small businesses, to help create jobs and employment, close the wide margin gap of tax between the rich, the lower, and middle class (Reduce tax rates for the middle and lower classes, and increase the rich tax rate by 15% more and give no tax breaks to the rich. Example: Say $200,000 annual salary and above should pay 15% more on their taxes). Also, the U.S. government should avoid approaching world problems single handedly, instead they should enlist and have the full unified body of the UN to take full responsibility and approach the problems or issues as they occur unilaterally and not as an individual. For example, the U.S. started the airstrikes on ISIS about two weeks before forming a collation, with cost spending about two million U.S. Dollars per day, a cost that was not thoroughly budgeted. Undoubtedly, this spending would bring back the economy to stagnation, an economy that is already in recovery from a recession with slow growth. Citizens should expect more recessions or an even longer one, large numbers of unemployment, and very likely investors would continue to move businesses overseas, so watch out for more economic stagnations by early 2015.
Manufacturing companies seeing the situation, business declines, sales volume dropping, and a decline on return on investment, loss on revenue, no profit, they should use the economics model known as opportunity cost based on marginal analysis to determine doing business in their home country or going overseas which would be better off. This fact holds true, because no investor or shareholder would like negative investment return instead of a positive return. Since economics is the study of how people choose to allocate to their score resources. Economists use models to study those choices. Most economic models have three common elements: scarcity, cost, and marginal analysis. Typically, something is scarce (for example, time or money). This results in the cost of doing one thing which means giving up doing something else). Therefore, the best way of finding out how to get the most of what one wants is by marginal analysis. These three concepts - scarcity, cost, and marginal analysis, form the basis upon which economics is built, and of great values to any individuals, companies, firms, organizations, government, society, nation in general worldwide. They have a great impact both being positive and negative. If they ignore it or wrongly apply it, they would suffer a negative impact. On the other hand if they are understood and are well leveraged they will have positive results. These concepts are what manufacturing companies and other businesses going overseas use as business decision making processes and determine whether it’s worth continuing doing business. For example in the U.S. under the present economic situation of high unemployment, slow growth or, the relocation of businesses to China or India where labor is cheap, manufacturing/production cost of doing business in those countries is cheaper compared with the present situation of doing business in the U.S.
How these three economic models work:
Scarcity: most people want more than their current resources allow them to have. This is scarcity: people wanting more than they can be satisfied with the available resources. Don’t confuse scarcity with: even the rich want more! And remember the fact that there being only a small quantity of a good (such as castor oil cola) does not make it scarce: it must also be desirable.
Scarcity forces people to make choices. When a good is scarce, people are forced to choose between which uses will be fulfilled and which will not be fulfilled. As a consequence, people face a trade-off: to satisfy more of one need means satisfying less of another. For example, when people save their money by putting it into a savings account, they are trading off spending that money today in order to have to spend it in the future.
Opportunity Cost
When a good is scarce, choosing to use the good in one way means giving up some other use. The value of the use people give is the opportunity cost of the choice. Opportunity cost can also be defined as the “value of the forgone alternative use.” This emphasizes that had people not made the choice they did, they would have then chosen the next best alternative.
Marginal Analysis: How should people allocate their scarce resources to get the most value? To answer this question, economists use marginal analysis: the analysis of the benefits and costs of the marginal unit of a good or input. This technique is widely used in the business decision making and ties together much of the economic thought.

In any situation, people want to maximize net benefits:
Net Benefits = Total Benefits-Total Costs. To do this, they can change a variable, such as the quantity of goods or the quantity of output they produce. This variable is the control variable. Marginal analysis focuses on whether the control variable should be increased by one control variable. For the benefit of those who may want to know or learn how marginal analysis are used in business decision making and ties together much of the economic thought, so take note of this illustration:
Key procedures for using marginal analysis
 Identify the control variable and determine what the increase in total benefits would be if one more unit of the control variable were added. This is marginal benefit of the added unit. Determine what the increase in total cost would be if one more unit of control variable were added. This is the marginal cost of the added unit.If the unit’s marginal benefit exceeds (or equals) its marginal cost, it should be added. 

Note: So why are manufacturing companies and other businesses outsourcing or going overseas? Compared with doing business in the U.S. under the present economic situation in the short-run, their marginal benefit would not exceed (or equal if marginal cost should be added), because they see the economy would not recover in the short-run, hence we see the slow recovery of the economy) or slow growth.
Remember to look only at the changes in total benefits and total costs. If a particular cost or benefit does not change, ignore it. Why does it work?
Because                                  Marginal benefit = Increase in total Benefits
                                                Marginal cost = Increase in total costs
So                                            Change in net benefits = marginal benefit-marginal cost.
When marginal benefits exceed marginal costs, net benefits go up. So the marginal unit of the control variable should be added.
Example: should a firm produce more?
A firm’s net benefit of being in business is its profit. The following formula illustrates how profits are calculated: Profits=Total Revenue-Total Cost.
(Note that total revenue is the same thing as total sales. Do not confuse “revenue” with profit.)
Here is a problem and solution as an example:
Problem:      International Widget is producing 50 widgets at a cost of $50,000 and
                        selling them for $60,000. If it produces a 51st unit, its total sales will be
                        $62,000, and its total cost will be $51,500. Should the firm produce the
                        51st unit ?
Solution:      Yes, the 51st units marginal benefits is $2,000 and its marginal cost is
                        $1,500. It should be produced. It adds $500 to profit ($2,000-$1,500).
Example:        Should a better worker be hired?
The following problem emphasizes the importance of looking at the change in total benefit and cost.
Problem:      ACME manufacturer has trained worker A at a cost of $30,000 and
                        worker A is worth $70,000 to ACME. A worker’s worth to a firm refers
                        to how much the firm presently values all the future profits if expects to
                        make from the worker, these profits being the revenues produced by the
                        worker less wages, and fringe benefits. Later ACME has the opportunity
                        to hire Worker B. Worker B would cost $30,000 to train but would be
                        worth $90,000. However, to hire worker B, ACME must fire worker A.
                        Should ACME hire worker B?
Solution:      No. Hiring worker B and getting ride of worker A adds $20,000 in
                        increased worth (so the marginal benefit of this decision would be
                        $20,000). The marginal cost of doing this is $30,000 in added costs for
                        training worker B. Since the marginal cost exceeds the marginal benefit.
                        ACME should not hire worker B. What about worker A’s training cost?
                        We ignore it because firing A and hiring B neither increases nor reduces
                        this cost. Since it has already incurred.
Based on these two problems illustrated as simple economics model, should show the best way to find out to get the most of what one wants is by marginal analysis. These three concepts-scarcity, cost, and marginal analysis-form the based upon which economics is built.
Note: Remember to look only at the changes in total benefits and total costs. If a particular cost or benefit does not change-ignore it.
Again: why does this work?
Because                    Marginal Benefit=Increase in Total Benefits
                                    Marginal Cost=Increase in total Costs
So                                Change in Net Benefits=Marginal Benefits-Marginal Costs.
So you can see and understand the reason why corporate manufacturing companies and other business firms are outsourcing and/or, moving their business of investments from one country and/or country of doing business originally to other countries that they will pay less corporate taxes if any, low manufacturing costs and overhead plus other costs such as administrative costs, etc. Compared with doing business in their own countries undoubtedly this fact holds true-that a firm’s manufacturing company’s net benefit of being in business is its profits.
Note: marginal analysis forms the basis of economic reasoning. To aid in decision making, marginal analysis looks at the effects to small change in the control variable. Each small change produces some goods (its marginal benefit) and some bad (its marginal cost). As long as there is more “good” than “bad,” the control variable should be increased (since net benefits will be increased).
The change in net benefit equals marginal benefits minus marginal costs, and then looking at action causes net benefits to go up.