Sang Zhe, China, is a city of 1.2 million just south of Shanghai. It has the lar

Question

Sang Zhe, China, is a city of 1.2 million just south of Shanghai. It has the largest collection of vendors willing to engage in serious price competition. China’s International Commodities Fair is home to about 2,500 exhibitors from more than 20 countries and regions who come to showcase their products at 4,500 booths at the the International Exhibition Center. The event attracts over 200,000 visitors, among whom more than 60,000 are buyers. The Fair touts itself as the premier discount outlet of the globe, almost anything can be purchased there. The modern market covers an exhibition area of 150,000 m2 with over 14 industries displaying their wares, namely hardware, mechanical and electrical machinery, electronics and electrical appliances, daily necessities, crafts, stationery and sports goods, outdoor leisure products, needle textiles, ornaments and accessories, toys, e-commerce and business services, pet products, motor vehicle parts and components, and festival supplies. You can find name-brand products as well as cheap knock-offs. Most of the products are produced in nearby. Those producers are less concerned about brands and branding than they are about simply selling high-volumes of low-profit margin products.

a. Every year, more vendors continue to seek space in the Fair, what conclusion can you draw about the relative opportunity cost of production in China? What will happen to production costs elsewhere in the world as a result? Why?

b. With the increased competition emanating from the Fair, what will happen to any economic profits these firms earn? Why?

c. Firms even apparently prefer to relocate into regions that display rising spending. How can this be, since higher public spending requires more tax revenue to support it?

Explanation / Answer

This shows relative opportunity costs of production in China are low. Relative production costs will rise elsewhere in world because in reality relative price are opposite of each other. As relative prices are low in China it means relative prices are higher in world. Production costs will rise in other parts of world as more Chinese demand for resources will increase unit cost. This happened few years ago with steel as greater demand and production in China led to higher prices overall. But when demand fell prices of iron ore also fell.

B economic profits will decline due to lower prices and higher costs as more firms compete for market and resources

C higher spending mean higher demand and thus higher revenue. Even with higher taxes more profits can rise if rate of increase of revenue is greater than rate of increase of tax. Further when demand is growing more tax revenue can result from same tax rate because GDP increases and tax being proportion of GDP also increases naturally

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