Question

From an economic point of​ view, India and China are somewhat​ similar: Both are​ huge, low-wage​ countries, probably with similar patterns of comparative​ advantage, which until recently were relatively closed to international trade. China was the first to open up. Now that India is also opening up to world​ trade, how would you expect this to affect the welfare of​ China? Of the United​ States? ​ (Hint: Think of adding a new economy identical to that of China to the world​ economy.)

Answer 1

Answer: The welfare of China would probably be reduced due to the competition with Indian market. The prices of the goods they are selling would reduce, and they would have to think of strategies in order for their buyers to be more attracted to their offers instead of the Indian ones. With less income in Chinese economy, salaries would also decrease and the prices of some products would rise, resulting in an increase in poverty rates.

For the U.S., such a decision wouldn't affect their welfare in a bad way. Being the largest Chinese market buyer, U.S. would have more options to choose its products, and would probably buy them for a smaller price, since India would try to compete with China by diminishing the products' prices in order for them to become more attractive. Then, buying the same products spending less money, the welfare rates would increase, since the goods would become less expensive and the wages would be mantained.