South-Western College Publishing - Economics  
China-and Everyone Else--Doing What They Do Best
Topic International Trade
Key Words Comparative Advantage, Exports, and Economic Growth
News Story Since the early 1990's, China has been a great manufacturing story. Making the best of their comparative advantage in labor and operating more like a capitalistic economy than in its communist past, China has been growing at double digit rates. Economists define "comparative advantage" as the ability to produce a good or service at a lower cost relative to other goods and services, which leads to natural win-win situations for free trade. International trade theory teaches that a country will be better off specializing in the good or service in which it has a comparative advantage and trading for goods and services that it doesn't produce as efficiently. In China's case, its vast labor resource gives it a comparative advantage to manufacture many labor-intensive products and then trade for technological and culture-related goods from the West.

China has used this strategy of producing labor intensive goods and trading for other goods to become one of the fastest-growing economies in the world--and also one of the largest. In 2005, China's economic growth rushed its economy past Italy, overtook France, and then passed Britain to become the world's fourth-largest economy. Their annual output of $2.3 trillion lagged behind only Germany, Japan, and the United States.

No other major country has grown much faster than 5 percent in the last 30 years. Even when Japan used the same theory of comparative advantage to produce capital-intensive goods for export, the economy grew at only about 5 percent. China, on the other hand, has averaged double-digit growth for the past 15 years. Its most recent measure was at 11.3 percent.

The Chinese economy has been fueled by growing exports over the years and now a domestic spending component appears to be kicking in. Increasing wages and incomes for Chinese consumers and increasing investment possibilities for businesses are causing an additional pressure on the economy through consumer and investment spending. Such rapid growth with all factors added together are beginning to worry government bureaucrats, economists, and analysts who see the inherent risks of inflation and overheating that can occur when an economy grows too fast. The next question: Will the Chinese government take any significant action to prevent economic overheating.

Discussion Questions:
1. Discuss the notion of comparative advantage as it applies to China. For what kinds of goods has China traded its manufactured items?
2. Why do you think economists and analysts are worried about China's rapid growth? What happens when an economy "overheats"?
Multiple Choice/True False Questions:
1. Which concept below identifies the rationale for international trade?
  1. the law of supply.
  2. comparative advantage.
  3. increasing opportunity costs.
  4. consumer sovereignty.
2. China has grown to become the ______ largest economy in the world.
  1. third
  2. fourth
  3. fifth
  4. sixth
Source David Barboza, "China's Surge Raises Fears of Runaway Economy", The New York Times Online, July 19, 2006.
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