Question

Analyse why the price of a product may be higher in the USA than China. (6 marks)

Answer 1

Answer:

hope this helps u dear ❤️

Answer 2

It all has to do with the purchasing power in different countries and relative levels of income and wealth.

First, let’s consider the average income in China and the United States:

China: $4755

United States: $51939

When we consider these two it becomes obvious that people in China simply cannot afford to pay as much for goods as Americans. This results in the relative price level in China being much lower than in the U.S. simply because Americans can afford to buy more of a good at every price than Chinese consumers due to more wealth and income.

To demonstrate this concept, let’s consider the ‘Big Mac Index’. The BMI uses the prices of Big Macs from around the world to compare prices.

The Big Mac index

If you visit the link above, you’ll see that richer countries generally have higher BMIs in dollar terms. This is because producers (like McDonalds) optimize their prices to sell well in local economies. This is at the core of the concept of PPP (Purchasing Power Parity) but PPP has tons of flaws.

But if you look at relative price levels, based on income, products in China are not necessarily that much cheaper.

Products in China seem cheaper to you because you are used to U.S. prices (I assume that you are American), but an average Chinese consumer would think that products in the United States are ridiculously overpriced because they do not have the relative income to support the purchases.