There is an ongoing debate between the U.S. and China regarding whether the Chin

Question

There is an ongoing debate between the U.S. and China regarding whether the Chinese yuan's value should be revalued upward. The cost of labor in China is substantially lower than that in the U.S.

a. Would the U.S. balance of trade deficit in China be eliminated if the yuan was revalued upward by 20%? Or by 40%? Or by 80%?

b. If the yuan was revalued to the extent that it substantially reduced the U.S. demand for Chinese products, would this shift the U.S. demand toward the U.S. or toward other countries where wage rates are relatively low? In other words, would the correction of the U.S. balance of trade deficit have a major impact on U.S. productivity and jobs?

Explanation / Answer

a) Thusis an open question without a perfect answer.Yet,it should at least make students realize that a small increase in the value of yuan is not going to make chinese products more expensive than U.S products in labour intensive industries,given that Chinese wages may be less than one-tenth of U.S. wages in these industries.

b) To the extent that there are decent substitute products in other low wage countries,it seen likely that U.S. consumers would just shift their demand toward the products in these countries.If correction in the U.S. balance of trade deficit with China would shift jobs to low-wage countries rather than to the U.S.

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