Analysis Of The Influence Of The Rising Labor Cost On One Country's Terms Of Trade

Under the background where China's labor cost keeps rising and its growth of foreign trade starts to slow down,this paper establishes a theoretical model not only to figure out the specific influence of China's up-going labor cost on its trade benefits,but also to enrich the related theories of international trade.Meanwhile,by means of elaborating how one nation's commodity terms of trade as well as its income terms of trade change as the labor price rises,the influence of the rising labor cost of China on its terms of trade(TOT)is explained at the end of this paper.For the sake of a case where the most important factor against the TOT goes to the price index of a country's import and export commodities,thus,at the very beginning,the expression of how the enterprises price their commodity was given by setting up a monopolistic competition model with a microcosmic perspective.By studying the given expression above,the specific factors which make effects on a country's commodity prices that are vital to its TOT were obtained,and the factors include: resident expenditure level,enterprise production cost,market structure of various sectors,industrial structure.Particularly speaking,the rise of labor cost could affect TOT indirectly by directly changing the resident expenditure level,enterprise production cost and industrial structure.On the basis of the microcosmic model,this paper has made it further to establish a macroscopic model of trade between two countries.By resorting to the theoretical framework of New Geography Theory,this macroscopic model amends the “small countries” assumptions of traditional models,and puts forward a view that the output of enterprises,commodity prices and resident income of both countries are related mutually.By supposing that the labor price is a exogenesis variable and there exists no trade cost at all,the short term,medium term and long term equilibrium after a sudden rise of a nation's labor cost are computed,no other than what specific changes of its commodity terms of trade and income terms of trade might take place within all the three cases above are stated.The final results turn out to show that,in a short term,a rise of one nation's labor cost makes no impact on its commodity terms of trade,while it does deteriorate its TOT.In the medium and long term,however,the increasing labor cost could roughly improve a country's TOT though.Specificly speaking,under the circumstance where domestic labor cost is relatively higher or the number of enterprises is much smaller,the rise of labor could also deteriorate domestic TOT in the medium term.Further more,the rise of a country's labor cost could benefit its TOT as long as the labor supply remains at peak in a long term.In the end of this paper,combined with the present situation where the labor price of China continues to grow and with the future tendency of its TOT,several reasons why China's TOT tends not to be improved in the long term are explained as the labor cost keeps on rising.The possible reasons include that : the price of capital declines,labor productivity promotes,the structure of export commodities maintains a low-end while the diversity of high-tech commodities import becomes remarkable,est.The up-growing of China's TOT in the long term,is closely related to the growing number of employment as well ad the rising labor price.Though,the growth might slow down,China's income terms of trade would go on increasing as the labor price rises before the supply of labor reaches the Lewis turning point.At last,it points out that,only when the premise of clearing the labor market is meet will the rise of labor benefit China's TOT.Besides,increasing the types of export commodities,lifting up the ratio of high-tech commodities of export could also help to advance the trade benefits of China.