Why an imported Chinese product in India is cheaper compared to a locally manufactured item?
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1$\begingroup$ Do you have a clear evidence on this? For the same product? $\endgroup$– emeryvilleSep 24, 2017 at 18:19
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$\begingroup$ Sorry, no clear evidence. But still read further, an Indian made umbrella which I feel I should buy costs 400 rupees (Indian currency), a Chinese umbrella costs 200 rupees, the quality difference is minor(initially) $\endgroup$– VikramSep 24, 2017 at 18:46
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2 Answers
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Consider an exact same product, say an umbrella, which is both imported from China in India and locally produced. The reason why the Chinese product is cheaper compared to the local one could be related to differences in productivity or total factor productivity. The Chinese product could be relatively cheaper because Chinese firms use better production techniques, higher-quality general labor and capital input, better managerial practice/talent, or better information technology. See the JEL survey about What Determines Productivity?
The recent paper by Rodrik and co-authors documents that labor productivity is higher in China than in India (see Table 1). This could be a first reason why prices of the same product differ.
answered Sep 24, 2017 at 19:23
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$\begingroup$ I edited my answer first because the difference in labor productivity is not only economy wide but also sector specific. Second, here I compare the Chinese product to the Indian one. Saying that the Indian umbrella costs 400 rupees and the Chinese on costs 200 rupees is equivalent to saying that the Chinese product is half the price of the Indian one. $\endgroup$ Sep 25, 2017 at 9:04
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1$\begingroup$ I am afraid you are right! I will fix this later on. I can't do it right now unfortunately. $\endgroup$ Sep 25, 2017 at 9:40
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$\begingroup$ How does the theory of CA explains the existence of the same homogeneous good in the two countries? There is no love for variety argument here. I think CA is not the core of the argument. $\endgroup$ Sep 25, 2017 at 12:22
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1$\begingroup$ Thanks @denesp for your comment and your vigilance. Sorry about that confusion. Hope this modified answer helps. $\endgroup$ Sep 25, 2017 at 17:09
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The cost of the umbrella is the sum of the cost of input raw resources (wood / plastics / metal / fabric), labor, transport and retail. Assuming the retail costs are the same (you're buying in the same store, for example), then the difference is on the other factors.
Keep in mind that the cost of all the factors can be manipulated by the Chinese and Indian currency. Given that China probably owns all the resources needed for the production of the umbrella, they can produce it all and export it at a low price by devaluating their currency, lowering the total production cost of the umbrella. This will make China's exports cheaper and imports more expensive.
Without a specific case, we can't give you a more specific answer, but hope it helps!
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1$\begingroup$ It is worth noting that price (which is 400 rupees) and cost is usually not the same thing. $\endgroup$– GiskardSep 25, 2017 at 10:14