“Effects of China’s Clothing Industry Expansion on Importing and Exporting Countries: A Comparative Analysis”

QUESTION

6. Imports and Exports

When China’s clothing industry expands, the increase in world supply lowers the world price of clothing. Consider the effects this has on both an importer and an exporter of clothing.

Suppose the following graph represents the market for clothing in Vietnam prior to the expansion of China’s clothing industry. Vietnam is an    of clothing because the world price is    the domestic equilibrium price.

Note: You will have to use green points (triangle symbol) and purple points (diamond symbol) to shade the consumer and producer surplus areas on the following graphs. There are two green points and two purple points per graph. Use either one point of both to most accurately indicate the areas. For example, if indicating the consumer surplus requires only one green point, leave the second one on the palette.

Use the green point (triangle symbol) to shade consumer surplus in Vietnam before China’s clothing industry expands. Then use the purple point (diamond symbol) to shade producer surplus.

Market for Clothing in VietnamConsumer SurplusProducer SurplusPrice of ClothingQuantity of ClothingDomestic DemandDomestic SupplyWorld Price

On the following graph, use the green point (triangle symbol) to shade consumer surplus in Vietnam after China’s clothing industry expands. Then use the purple point (diamond symbol) to shade producer surplus.

Market for Clothing in VietnamConsumer SurplusProducer SurplusPrice of ClothingQuantity of ClothingDomestic DemandDomestic SupplyNew World Price

Suppose the following graph represents the market of clothing in Germany prior to the expansion of China’s clothing industry. Germany is an    of clothing because the world price is    the domestic equilibrium price.

Use the green point (triangle symbol) to shade consumer surplus in the Germany before China’s clothing industry expands. Then use the purple point (diamond symbol) to shade producer surplus.

Market for Clothing in GermanyConsumer SurplusProducer SurplusPrice of ClothingQuantity of ClothingDomestic DemandDomestic SupplyWorld Price

On the following graph, use the green point (triangle symbol) to shade consumer surplus in the Germany after China’s clothing industry expands. Then use the purple point (diamond symbol) to shade producer surplus.

Market for Clothing in GermanyConsumer SurplusProducer SurplusPrice of ClothingQuantity of ClothingDomestic DemandDomestic SupplyNew World Price

Overall,    countris benefit from the fall in the world price of clothing, while    countries are harmed by the price change.

ANSWER

The expansion of China’s clothing industry has significant implications for both importing and exporting countries in the global clothing market. To understand these effects, let’s first examine the market for clothing in Vietnam and Germany before and after China’s clothing industry expansion.

Vietnam’s Clothing Market

Before China’s clothing industry expansion, Vietnam was an importer of clothing, and the world price was higher than the domestic equilibrium price. This meant that Vietnam’s domestic consumers were willing to pay more for clothing than the world price, resulting in a consumer surplus. Similarly, domestic clothing producers faced lower prices due to competition with cheaper imports, leading to a smaller producer surplus.

Before Expansion

Consumer Surplus (Green Triangle): This represents the area where domestic consumers benefit from paying a lower price for clothing than they were willing to pay before China’s expansion.

Producer Surplus (Purple Diamond): This area represents the loss incurred by domestic producers due to competition from lower-priced Chinese clothing.

After China’s clothing industry expansion, the world supply of clothing increases, causing the world price of clothing to decrease. As a result, Vietnam’s domestic consumers benefit even more from lower prices, leading to an expanded consumer surplus. However, domestic producers in Vietnam face increased competition from cheaper Chinese imports, further reducing their producer surplus.

After Expansion

Consumer Surplus (Green Triangle): This area grows as consumers enjoy even lower prices for clothing.

Producer Surplus (Purple Diamond): The producer surplus continues to shrink as domestic producers face intensified competition.

Germany’s Clothing Market

Before China’s clothing industry expansion, Germany was an exporter of clothing, with the world price exceeding the domestic equilibrium price. German producers were able to sell clothing at higher prices globally, resulting in a significant producer surplus. Domestic consumers paid less for clothing than the world price, generating a smaller consumer surplus.

Before Expansion

Consumer Surplus (Green Triangle): Domestic consumers benefited from paying less for clothing than the global market price.

Producer Surplus (Purple Diamond): German producers enjoyed a substantial surplus due to higher export prices.

After China’s clothing industry expansion, the world price of clothing decreases, leading to changes in Germany’s market dynamics. German consumers now pay lower prices for clothing, increasing their consumer surplus. However, German producers face challenges as they must now sell clothing at the reduced world price, resulting in a diminished producer surplus.

After Expansion

Consumer Surplus (Green Triangle): Domestic consumers benefit from even lower clothing prices.

Producer Surplus (Purple Diamond): German producers see a reduction in their surplus due to the lower world price.

In summary, countries that were previously importers of clothing, like Vietnam, benefit from the fall in the world price of clothing, as their consumers enjoy lower prices. However, their domestic clothing producers face intensified competition and suffer a decrease in surplus. On the other hand, countries that were exporters of clothing, like Germany, experience a boost in consumer surplus but see a reduction in producer surplus due to the lower world price.

Overall, it is essential to recognize that the effects of China’s clothing industry expansion are not uniform across countries and depend on their roles as importers or exporters in the global clothing market. Importing countries benefit from lower prices, while exporting countries face challenges in maintaining their previous levels of producer surplus.