Question

In: Economics

Recently, we have observed that wages in China have been increasing. What do you think will...

Recently, we have observed that wages in China have been increasing. What do you think will happen to external economy industries currently located in China?Will these industries move to foreign countries with lower wage? Why or why not? Please use the theories discussed in this module to explain your answer.

Solutions

Expert Solution

In China many labor intensive goods are produced by local industries that benefit from external economies of scale. This means that it has an initial advantage in producing labor intensive goods by possessing external economies of scale. As the wage rate is rising in China this also increases the cost of production in China and reduces the advantage it once held from external economies of scale. Because China has been producing these goods for such a long time they still hold an advantage over the low cost manufacturers because of the head start they have in producing. Because of Chinas existing external economies it can still produce at a higher level of output than the low cost places that have a lower overall production cost. Because of Chinas head start and established external economies I do not think that they would move to a lower wage country because they would not be able to produce at the same level of output.

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