In: Economics
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.
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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