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Examine the significance of the effect of the Chinese economy to the future prosperity of developed and developing countries.

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Introduction

Examine the significance of the effect of the Chinese economy to the future prosperity of developed and developing countries There is much speculation as to China's economic future, underlined of late by their entry into the World Trade Organization (WTO). There is no doubt that China has the potential to become one of the most economically powerful nations in the world as it has access to vast numbers of employees in the labour pool. China's population now exceeds the one billion mark. In fact, it is predicted by the WTO's next director-general, Supachai Panitchpakdi, that if all goes well in the subsequent period after China's entry into the WTO, the country will become one of the two or three biggest economies in half a century. This has unsurprisingly lead to widespread alarm, and even panic, around the Western developed World. Some see it as an economic disaster for them; after all, how can they possibly compete with China with such phenomenally low costs in China as far as labour is concerned? We need only look at the Chinese exports over the period 1948-2001 to see how the Chinese economy has changed in comparison with that of post-war Japan. Of course, if we were to examine the statistics of late, we would most likely see a continual increase in the percentage of exports that China commands, and if we were to go one step further and predict the future economic state of China, we would probably see (depending upon by whom the forecast was made) ...read more.

Middle

Volkswagen and General Motors have also encountered much increased sales - rising by no less than 20% of late, pushing the total number of cars sold in China to over one million. This is just a taste of what is to come as far as China's position in the world economy goes, and we can expect many more businesses to benefit from China's cheap labour force and goods that are produced there: if the Chinese export goods to the UK, for example, consumers will be getting much cheaper products from overseas. Trade is never a zero-sum game. We should be looking towards establishing how extensive our comparative advantage will be, not our competitive advantage. Admittedly these are economic leakages, but are they significant enough to negate the much increased consumer surplus, the majority of which will be in all in all likelihood be spent in the domestic economy, thus increasing revenues for businesses and helping the economy grow as a consequence? It is difficult to tell, as with all economic predictions, because the further forward we try to look, the more uncertain the world becomes. We can make use of leading indicators course, such as GDP figures, industrial production and, normally, consumer prices. The big problem with looking at consumer prices in such a labour-intensive economy as that of China, is that because the supply of cheap labour is at such a level, it is unlikely that consumers will experience much reduced prices at such an early stage in China's development. ...read more.

Conclusion

order to avoid falling over, and may suffer from numerous setbacks in the future, but if managed well, it could become the world's largest economic power within the next fifty years. Extra Notes * It is important that wages rates don't rise significantly for China as the cheapness of its production is the main source of competitive advantage, so if wage rates increase due to soaring demand for Chinese products, costs for companies will rise and therefore prices for consumers will act similarly to account for the rise of costs, but only if the company thinks that it will not experience significantly lower profit margins as a result. In fact, Chinese costs can probably double and still maintain their competitiveness, except the consumer surplus level will be reduced. Wage rates are on average in China now approx. 40� an hour, dramatically less than the likes of Mexico, and even India. So China can afford to let its prices rise slightly higher before people will start buying abroad, although due to the phenomenal size of the Chinese workforce, plus the recent 110,000 lay offs taken place in the last few years, there needs to be significant numbers of new businesses to absorb the superfluous labour in the market. * Chinese labour is unskilled as a rule, so there will rarely be a skills mismatch in the labour-intensive sector of the market. 1 'The Economist' Feb. 15th-21st '03 p.12 2 The Economist Feb. 15th-21st '03 p.13 ...read more.

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