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Chapter 5: Q3. (page 223)

Why do you think a retailer prefers to have Li & Fung arrange international production of its jeans rather than purchase them directly from a jeans manufacturer in mainland China?

Short Answer

Expert verified

The retailer will save time and cost if it orders from Li & Fung instead of buying it directly from a manufacturer in mainland China.

Step by step solution

01

Reason behind retails choosing Li & Fung for international production

The Company (Li & Fung) provides many services other than manufacturing. These services include selecting the design, cost-effective production method, taking orders for the product, logistics for transporting, and many more. These services are required for a retailer’s product to succeed in the market.

Thus, if a retailer decides to take service from Li & Fung, it will save a lot of time and money. A manufacturer from mainland China will only save some cost on manufacturing the product, but Li & Fung will be much cheaper to the retailer because it includes other services.

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Most popular questions from this chapter

In 2015, the United States proposed a tariff on steel imports from China. Steel is input in a large number and variety of U.S. industries. Explain why political lobbying to eliminate these tariffs is more likely to be effective than political lobbying to eliminate tariffs on consumer goods such as sugar or clothing.

Suppose the world price of butter is \(0.50 per pound and the domestic price in autarky is \)1.00 per pound. Use a diagram similar to Figure 5-10 to show the following.

a.If there is free trade, domestic butter producers want the government to impose a tariff of no less than\(0.50 per pound. Compare the outcome with a tariff of \)0.25 per pound.

b.What happens if a tariff greater than $0.50 per pound is imposed?

What is the source of Li & Fung’s success? Is it based on human capital, on ownership of a natural resource, or on ownership of capital?

What principle do you think underlies Li & Fung’s decisions on how to allocate production of a good's inputs and its final assembly among various countries?

In the United States, the opportunity cost of 1 ton of corn is 50 bicycles. In China, the opportunity cost of 1 bicycle is 0.01 tons of corn.

a.Determine the pattern of comparative advantage.

b.In autarky, the United States can produce 200,000 bicycles if no corn is produced, and China can produce 3,000 tons of corn if no bicycles are produced. Draw each country’s production possibility frontier assuming constant opportunity cost, with tons of corn on the vertical axis and bicycles on the horizontal axis.

c.With trade, each country specializes in its production. The United States consumes 1,000 tons of corn and 200,000 bicycles; China consumes 3,000 tons of corn and 100,000 bicycles. Indicate the production and consumption points on your diagrams, and use them to explain the gains from trade.
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