Changing Economic Systems

China has been in the economic news a lot recently for a couple of reasons. The Chinese stock market has seen a loss of value over the past several months. Additionally, China has decided to devalue its currency, making Chinese exported goods more expensive to other countries. While there are many reasons for the Chinese decision, the overall affect on exports should be marginal at best once the stock and capital markets of the rest of the world adjust to the changes.

Economists study the impact of currency prices, exports, tariffs (basically taxes on imports), labor, wealth, and their social impact. Some economists study these things within a single market (the microeconomist) and some study the interrelationships between several markets (they are called macroeconomists). Economists, like other scientist, develop theories that try to explain these relationships and predict with a degree of certainty the outcome of various policy decisions.

China is not alone in its transition from a planned economy to one embracing more of a mixed or free economic system. Planned economies have a central authority that dictates what goods and services are produced, in what quantity, and at what price. The central idea is that all citizen will enjoy equal access to their needed goods and services. Unfortunately, the complexity associated with this planning, even in our high-tech world, proves to be increasing difficult. Also, the societal demands to enjoy more consumer products and increased individual wealth have been a major reason why some of these economies are now moving toward a more free market system.

During the transition from a planned to free economic system, China became the main exporter of manufactured goods, and the importer of food commodities, raw materials, and energy. Many people have historically expressed concern over the increasing reliance the US has had on imported goods from China and have decried the loss of jobs. One assumption that was tested by the economist Christina Broda on oxfordjournals was the damage these cheap imported goods was having on the US economy.

Broda holds a Ph.D. in Economics from the Massachusetts Institute of Technology. He was a tenured professor of economics at the University of Chicago’s Booth Business School and has done research published in a number of peer-reviewed academic journals.

Using this model, Broda discovered that the low-cost imports from China commonly sold by mass merchants like Wal-Mart and Target actually increased the buying power and reduced the effects of inflation on low and medium income households. While it was true some suffered the loss of jobs and income by having their job sewing jeans, for example, the overall economy benefited from having the jeans imported from China.