Question

[Statement] China is undergoing rapid economic change: twenty years ago, it was a developing political economy; today, its economy is in transition; twenty years from now, it may well be a developed political economy.

Q 4) China’s factor endowment (i.e., a factor of production) twenty years ago was rich in labor (and land) and poor in capital. “Rich” means abundant/cheap, and “poor” means scarce/expensive. If China succeeds in becoming a developed political economy in the next twenty years, what will its factor endowment likely be then? [Hint: Capital can transform other production factors, and China has many laborers who will gain more skills through capital investment with an assumption that the Chinese government manages wages of skillful Chinese laborers to bid at a below international market price.]

Answer 1

If China succeeds in becoming a developed political economy in the next twenty years , its factor endowment will be like :

"Rich" in capital and "poor" in labour .

since a developed economy has more resources for creation of capital and after twenty years when China would be developed, its cost of capital would be cheap and easily affordable.

Economy would be using more of capital intensive technology rather than labour intensive.

Increase in capital will help many laborers gain skill through capital investment and transform themselves into skilled laborers.

Skilled laborers will help in developing a technology that will provide goods at cheaper prices.

Laborers would be available in less quantity as skilled labour requirements would be less in a capital intensive economy.

So, since laborers would be less in demand so they would be scarce and would be expensive than capital intensive methods.