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Social Science Clinic => Economics => Topic started by: mia on May 25, 2020

Title: Explain whether a rise in wage rates in China by 10 per cent would lead to a rise in the price of ...
Post by: mia on May 25, 2020

Question 1

What are the two main ways in which changes elsewhere in the world have an impact on a country?

Question 2

Explain whether a rise in wage rates in China by 10 per cent would lead to a rise in the price of Chinese imports into the UK by 10 per cent.

Title: Explain whether a rise in wage rates in China by 10 per cent would lead to a rise in the price of ...
Post by: wuly on May 25, 2020

Answer 1

Via trade (exports and imports) and via international currency flows. Both will affect the exchange rate, and then, directly or indirectly, interest rates, investment, aggregate demand, inflation and unemployment.

Answer 2

It is highly unlikely that this would be the case. For a start, wages constitute only part of the costs of producing goods. As wage rates rise relative to the prices of other factors of production, so Chinese companies are likely to seek less labour-intensive methods of production.
Second, the price of Chinese imports depends on the exchange rate. As Chinese prices rise, this will tend, other things being equal, to reduce Chinese exports and probably worsen the Chinese trade balance. This in turn would tend to lead to a lower exchange rate of the Chinese yuan, and hence dampen the price increases of Chinese exports.
Finally, only part of the price of Chinese goods in the shops goes as export earnings to China. Part goes to UK retailers and distributors.