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Yuan Opinions

Nov 18, 2010 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, International Trade and Finance • 197 Views    No Comments

Can you imagine 43 million pairs of socks a year, 5,000 an hour, some saying Dora the Explorer, being produced by one Chinese manufacturer? When you pay $2.99 for a pair of those socks at Wal-Mart, they probably cost that Chinese manufacturer, Shuangjin Knitting and Textile, 25 cents to make. The Chinese firm then sells its socks to U.S. distributors like PS Brands, the largest importer of Chinese socks. Finally, retailers like Wal-Mart, Disney and Adidas buy the socks from PS Brands.

Moving in the opposite direction, complex electronic components are sent from the U.S. to China. Staco Systems, a small California firm, exports its aerospace components to Chinese factories. On the retail side, Apple considers China a market for its iPods and iPads as do General Motors and Ford for their cars.

The Economic Lesson

This takes us to the pressure the U.S. is placing on China to stop undervaluing its currency. Whether looking at Wal-Mart and Apple or you and me, China’s response will have very real consequences. But the consequences vary.

A more expensive yuan in relation to the dollar could narrow PS Brands’ profit margins and make retail sock prices rise. But also, it could increase business for Staco Systems and other U.S. exporters. We might find manufacturers transferring businesses from China to other, more cost effective developing nations. Large firms could locate in China to avoid foreign exchange. And all of that is only the beginning of a worldwide ripple responding to the yuan’s ascending value. 

To what extent is the yuan undervalued? You can look at the Big Mac Index.

 

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