Which of the following best explains how outsourcing contributes to global economic interdependence in the context of externalities?

• A. Outsourcing reduces the need for international trade by making countries more self-sufficient.
• B. Outsourcing prevents the spread of positive externalities by isolating economies from one another.
• C. Outsourcing allows countries to specialize in production where they have a comparative advantage, increasing trade and linking economies through shared benefits and costs.
• D. Outsourcing eliminates all negative externalities by ensuring that only domestic firms produce goods and services.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of outsourcing in microeconomics. Outsourcing occurs when a company contracts out certain business processes or production tasks to external firms, often in other countries, to take advantage of cost efficiencies or specialized skills.
2. Step 2: Recognize the role of comparative advantage. This principle states that countries benefit by specializing in producing goods or services for which they have a lower opportunity cost, and then trading with others. Outsourcing facilitates this specialization by allowing production to be located where it is most efficient.
3. Step 3: Connect outsourcing to global economic interdependence. When countries outsource production, they become linked through trade relationships, sharing both the benefits (such as increased efficiency and lower costs) and the costs (such as exposure to economic fluctuations in partner countries).
4. Step 4: Relate outsourcing to externalities. Externalities are costs or benefits that affect third parties outside the transaction. Outsourcing can spread positive externalities like technology transfer and knowledge sharing across borders, enhancing global economic integration.
5. Step 5: Evaluate the incorrect options by contrasting them with the correct explanation. For example, outsourcing does not reduce the need for international trade; rather, it increases it. It does not isolate economies or eliminate all negative externalities, but instead links economies through shared production and trade.