international ecnomics midterm

International Economics Midterms

Italy has always been one of the meccas of the fashion world . The Italian city of Milan , along with Paris and New York is considered to be one of the fashion capitals of the world . Clothing which has the label Made in Italy ' has always been considered a status symbol for the fashion conscious Western world . However , the number of clothing which is 'Made in Italy ' has been in constant decline . An example would be the leading Italian clothing brand of Benetton . In 1991 , 90 of Benetton 's clothing

was produced in Italy . In 2006 , that number was down to 30 with the number expected to decline further to 10 within the next few years . The reason for this decline is not a recession nor does it mean bad times for Benetton . Benetton , like many other companies not just in Italy but around the world has been moving their manufacturing operations to China . The benefit of manufacturing in China is primarily its low-cost . Wages in China are magnitudes smaller than the wages in the Western world

This is good for Italian manufacturers who are able to obtain better profit margins . This may not be so true for other sectors of Italian society . The reduction of local production from 90 to 30 in 15 years means that plants employing Italian citizens had been shut down . It would also be napve that only Benetton workers are affected . The whole clothing industry as a whole is affected by the migration of manufacturing to China . Other clothing manufacturers may opt to move \manufacturing to China and lose workers , or keep their local factories but become unable to compete with the price advantage enjoyed by Benetton

Classical economics teaches us that the government should not interfere with the market as much as possible . However , this is one case where the government has to step in . It may cause inefficiencies (due to firms not being able to operate at the lowest cost possible ) but it also lets the government achieve the economic objective of equity . The welfare of the majority (workers ) will have to be prioritized over the optimal operation of a few firms

There may be a need to enforce quotas and increased tariffs on clothing imports from China . These tariffs and quotas will help make locally produced goods cost competitive , both in manufacturing and retail costs with the goods imported from China . These tariffs will not solve the main problem which is the very low wages offered in China , they do however give local industry a chance to fight at more even playing field . Also , there is little fear that the companies who use Chinese labor will be severely affected . Since clothing , especially casual wear sold by Benetton , is a necessity its demand would be quite inelastic This means that there will always be a demand for t-shirts and jeans in Italy . Even if levied tariffs and quotas increase the cost of operations for companies , there would always be a firm...