# Chinese Economics – Financial and Economic System Mentor

ChineseEconomics – Financial and Economic System

Mentor:

ChineseEconomics – Financial and Economic System

Tofind out whether the productive efficiency of state enterprisesimproved from 1988 to 1996, what regression equation should theresearcher estimate? Under what circumstances would one conclude thatthere was a statistically significant improvement between these twoyears?

Productiveefficiency is the state when goods and services are produced with theoptimal combination of inputs, at the minimal cost, and the outputrealized is at maximum. At the production efficiency, an economy orenterprise must produce alongside its production possibilityfrontier, whereby when production of one good increase, the othermust reduce simultaneously. The productive efficiency is measuredthrough Cobb-Douglass equation. Concerning China, the productiveefficiency of state enterprises is measured through the total factorproductivity (TFP) of the Cobb-Douglass function. TFP measures theproductive efficiency by measuring the output while holding the twoproduction inputs constant.

In(Y/L)= In A + β In (K/L)

WherebyY is the total production, L is the labor used in the production, Kis the capital invested in the production. A is the total factorproductivity that measures the productive efficiency. Alpha is theoutput elasticities of labor, and it is constant. When a researcheris using the given regression equation, capital and labor are assumedto be similar for the firms in the same group. Secondly, the laborand capital functions must add up to one. Therefore, in using theregression equation and data from 188 to 1996, the researcher canestimate A, which is the gradient of the regression line and itmeasures the productive efficiency.

Astatistically significant improvement is the improvement hassufficient data to prove the increase in production. Thecircumstances that result in statistically significant improvementinclude when the domestic product has grown considerably, togetherwith the units produced. Furthermore, statistically significanceimprovement is achieved when the difference in labor and capital usedis significant.

Tofind out whether the efficiency of township and village enterpriseshad increased more than the efficiency of state enterprises, whatregression equation would the researcher estimate? How would onedecide that the increase in efficiency for township and villageenterprises was more?

Whencomparing the productive efficiency between Township and VillageEnterprises, and the state enterprise, the same Cobb-Douglassregression is applied only that the comparison factor is added. Inthe computations

Townshipand village enterprises = In(Y/L) = (In A +αt) + β In (K/L)

Stateenterprises = (In A +αt) + β In (K/L)

Inthe data table, a new column known as the dummy variable is formed asthe combination of n for township and village enterprises, and n forstate enterprise. Having the dummy coefficient d and the statecoefficients t the difference in the productivity can be estimated.Therefore, when the estimate of the alpha for village and townshipenterprises turns out significantly larger than that of stateenterprises, then it can be concluded that the productivity is avillage and state enterprises is improved more than that of the state(Chow, 2015). Similarly, when the estimate of alpha of stateenterprise is significantly larger than that of village and township,then the productive efficiency for state improved more than the othervillage and township.

Assumethat the technology given in table 17.2 applies to both countries *A*and*B*,but the quantities of labor and capital available in country *A*arerespectively 180 and 50 units, and in country *B*arerespectively 100 and 80 units. Draw the production possibility curvesfor countries *A*and*B*whenthere is no trade.

Productionpossibility curve is a graphical presentation of the amountproduction of two different products given a certain amount ofresources. When the production of one increase the other has todecrease since the resources are believed to shift from one to theother (Mankiw, 2014).

ForCountry A,

Input |
Shoes |
Computer |
Input quantity |

Labor |
2 |
5 |
180 |

Capital |
0.5 |
5 |
50 |

2s+ 5c ≤180

0.5s+ 5c ≤50

2s + 5c ≤180

0.5s + 5c ≤50

ForCountry B,

Input |
Shoes |
Computer |
Input quantity |

Labor |
2 |
5 |
100 |

Capital |
0.5 |
5 |
80 |

2s+ 5c ≤100

0.5s+ 5c ≤80

Whatis the meaning of comparative advantage? Using the answer to question1, what does country *A*havea comparative advantage in producing and what does country *B*havea comparative advantage in producing? Explain. What is the range forthe ratio of the price of shoes to the price of computers that willenable both countries to gain from trade?

Comparativeadvantage is the benefit that a country gains when it export goodsthat it produces at relatively lower prices and import those that itproduces at a relatively high price (Levchenko & Zhang, 2016).The term relatively implies that domestic prices as compared to theforeign market thus, a relatively low price means that the localprice is lower than international market price. The comparativeadvantage is determined by the relative price, which is the gradientof the production possibility curve in the economy. Concerningcountry A and B, Country A has a comparative advantage in producingshoes while Country B has a comparative advantage in producingcomputers. Since the gradient of the slopes of the productionpossibility curves is in the ratio of 1:12, the range of price ofshoes to computer and shoes that will benefit both countries isbetween 1-12 units.

References

Chow,G. C. (2015). *China`seconomic transformation*.John Wiley & Sons.

Levchenko,A. A., & Zhang, J. (2016). The evolution of comparativeadvantage: Measurement and welfare implications. *Journalof Monetary Economics*,*78*,96-111.

Mankiw,N. G. (2014). *Principlesof macroeconomics*.Cengage Learning.

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