Question

From an economic point of view, India and China are somewhat similar: Both are huge, low-wage countries, probably with similar patterns of comparative advantage, which until recently were relatively closed to international trade. China was the first to open up. Now that India is also opening up to world trade, how would you expect this to affect the welfare of China? Of the United States?[Hint: Think of adding a new economy identical to that of China to the world economy. A graph of relative supply and relative demand would be helpful.]

Answer 1

India and China produces identical goods and services and India opens upto world market. The supply of products and services which China supply will increase as India will also export the similar goods and services.This will lead to rightward shift of the supply curve in world market. The price of the goods and services will fall in the world market. This will worsen the China's terms of trade and US terms of trade will benefit form this.