Chapter 17
China and India in the
World Economy
◼ Outline
Introduction: New Challenges
Demographic and Economic Characteristics
Economic Reform in China and India
The Reform Process in China
Indian Economic Reforms
Shifting Comparative Advantages
Case Study: Why Did the USSR Collapse and China Succeed?
China and India in the World Economy
Chinese and Indian Trade Patterns
Tariffs and Protection
Current Account Balances
Looking Forward
Four Issues
Services
Manufacturing
Resources
Multilateral Institutions
Unresolved Issues
Environmental Pressures
State Capitalism
The Choices Ahead
Chapter 17 China and India in the World Economy 107
◼ Learning Objectives
After reading this chapter, students will be able to:
17.1 State why China and India are considered disruptive to the status quo.
17.2 Describe the demographic trends in China and India.
17.3 Relate the economic reforms that occurred in China and India.
17.4 Compare and contrast the transition from socialism to capitalism in China and Russia.
17.5 Compare and contrast Indian and Chinese economic growth.
17.6 Use a gravity model to explain Chinese and Indian trade patterns.
17.7 Define total factor productivity and explain why economists use it to understand
whether growth in East Asia is similar to growth elsewhere.
◼ What Students Should Know after Reading Chapter 17
This chapter is revised from the sixth edition to focus on the two most populous nations of the world,
China and India. In addition to the basic facts about the economic and demographic characteristics of each
country, their trade patterns are described in detail. The focus, however, is on the changes in policy that
led each of them to turn from isolation and inward-oriented policies to outward-looking integration with
world economy and a greater reliance on market-based allocation schemes. Chapter 17 emphasizes the
importance of new players in the world economy and raises the question whether this is a return to a long-
run historical pattern or is something entirely new. In raising the question, that chapter illustrates how
each country had to implement difficult reforms with uncertain outcomes and how the world economy
played a varying role in each country’s successful return or entrance on the world stage.
108 Gerber • International Economics, Seventh Edition
◼ Assignment Ideas
1. One issue in studying China is the accuracy of data. While the international community has long
considered Chinese government data to be unreliable, in recent years, this has also been an internal
issue, resulting in the removal of at least one government official. Thus many individuals and
agencies have devoted time and statistical methods to creating better methods of estimating China’s
GDP and other economic indicators. Students can discuss and research why China might have an
incentive to misstate its economic data, both over time and in recent years, where growth has been
less hearty. Likewise, in part due to the existence of a large shadow economy, India’s growth may be
misstated. How might these figures be estimated if government data is inaccurate?
◼ Answers to End-of-Chapter Questions
1. Compare the role of agriculture in China and India.
Answer: Much of China’s growth has stemmed from moving labor out of low valued added
2. Describe the process of Chinese reforms from their beginning in 1978 up until China’s accession
to the WTO.
Answer: First reforms were in agriculture. Special economic zones were introduced to try out
3. What were the factors that led to economic reform in India, and what were the main elements of the
reforms?
Answer: India had an economic crisis which sparked a shift to reform. It also lost the USSR both
Chapter 17 China and India in the World Economy 109
4. Use the gravity model of trade to explain why China trades with Korea, Japan, the United States, the
European Union, Hong Kong, and Taiwan. *
Answer: The gravity model of international trade uses two variables to predict which countries trade
with each other: distance and GDP. The model hypothesizes that, all else equal, countries will trade
5. China is a middle-income country with abundant supplies of low-skilled labor. How does it manage to
export high-technology products? Does it have a comparative advantage in high-technology goods?
Answer: While China has abundant supplies of labor, it also has excellent coastal access and ports.
China’s proximity to specialized design and high-technology manufacturing in Japan and
6. What are the sources of China’s comparative advantage and how does that show up in the goods it
trades?
Answer: Low-wage, low-skill labor, economies of scale, and coastal areas with convenient
7. What are the factors that make India competitive in business services and computer and information
services? Do those factors give it a comparative advantage or do they reflect some other source of
competitiveness?
Answer: India has English as the language of business and a sector of its economy that is highly
110 Gerber • International Economics, Seventh Edition
8. Why has India not been able to develop a large low-wage, low-skilled manufacturing sector? Can it
skip this stage of development and go directly to services economy that exports high value-added
services?
Answer: Trade imbalances and the outsourcing of services both may lead to more protectionist
9. Chinese policies have created a great deal of controversy and discussion. What are some of the major
concerns of the countries that trade with China?
Answer:
China has a large trade surplus with the United States but not with all of its trading partners. China’s
imports have risen along with its exports. China’s trade surplus with the United States is not as large