Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
RMB Appreciation, Economic Growth and Income
Distribution in China and the World
James Xiaohe Zhang and Weiwei Ying
With a significant slowing down in economic growth especially in
the growth rate of exports since the beginning of the 2010s when
the appreciation of Renminbi (RMB) appreciation accelerates,
China also faces a challenge of improving the already
deteriorated income distribution. This raises a concern over the
issue on how to stimulate domestic demand when export growth
rate is slowing down and reduce inequality in income distribution
when the RMB has to be appreciated. Based on a simple two
sector theoretical framework, this paper examines the
relationship between RMB appreciation, economic growth and
income distribution in China through running simulation on an
applied general equilibrium model (the GTAP model).
Conclusions and policy implications are generated based on the
simulation results.
Key words: China, RMB appreciation, economic growth, income distribution
1 Introduction
Although there is no consensus being reached on whether and to what extent the
Renminbi (RMB) is under-valuated, and how an RMB appreciation could improve
global trade imbalances, some commentators (see for instance, Cline and Williamson,
2008, Goldstein and Lardy, 2008, 2009:51, Williamson and Cline, 2010) have
recommended that the RMB should appreciate for at least 25% from its 2008 level
which is almost approached by early 2013. At the same time, the growth rate of GDP
has been significantly reduced to a lower rate of 7.8% in 2012. The Chinese
government therefore has considered switching its development strategy from export
orientation to focusing more on its domestic market by boosting local consumption
created from increasing disposable income of ordinary households.
However, this goal is not an easy task for the new Chinese leaders to reach. When the
economic growth is slowing down from its high pace of double digit of the 2000s, the
level of inequality deteriorates. As reported by Mukhopadhaya (2013), the Gini
coefficient, as a key indicator of total inequality, increased from 0.327 in the early
1980s to 0.508 in 2008 in China. While the rural Gini increased from 0.275 to 0.371,
the urban Gini increased from 0.162 to 0.328 over the same period.
_____________________________________
James Xiaohe Zhang, Newcastle Business School, Faculty of Business and Law, University of
Newcastle, Australia
Weiwei Ying, International Business School, Beijing Foreign Studies University, China
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
Although income distribution issue in general is concerned in conventional theory of
international trade and finance, the empirical studies on the impact of currency
appreciation on income distribution is limited. While these two phenomenon have been
analysed intensively but separately in the literature (see for example, Fair 2010, Zhang
2012 for RMB appreciation and Secular et al, 2010, Mukhopadhaya et al 2011 on
inequality), from the best of our knowledge, no empirical study has linked the two
issues together to generate some constructive policy implications. This paper aims to
fill the gap. The task is carried out through simulations on an applied general
equilibrium model (the GTAP model). This paper contributes to the existing literature by
shedding a new light on the issue of how the appreciation of the RMB affects the
pattern of income distribution, particularly among owners of different productive factors
and sectors not only in China but also in the rest of the world.
This paper is organized as follows. The next section introduces briefly a theoretical
framework on the relationship between export growth and income distribution
underpinned by some empirical evidences. Section 3 presents the research
methodology before the simulation results are reported in Section 4. Concluding
remarks and policy implications are generalized in the final section.
2 Literature Review: Theory and Evidences
Conventional international economics reveals that free trade generates welfare gains for all
trade partners, but the gains may not be evenly distributed across different sectors and different
income recipients in a specific country, particularly in the short run. In international trade
theory, the notable Stolper-Samuelson Theorem maintains that an increase in the price of a
product increases the income earned by resources that are used intensively in its production, but
reduces the income of the resources that it uses less intensively (Stolper and Samuelson, 1941).
As a result, some people will suffer from free trade while others gain. Jones (1971) developed
this theorem further to reveal a “Magnification Effect” that transfers income among owners of
different factors of production in the short run.i
According to Specific Factor Model,, if there is a labor intensive urban industrial sector with a
specific factor of capital and a mobile factor of labor, and a land intensive agricultural sector
with a specific factor of land and a mobile factor of labor, a general equilibrium two-sector and
three specific factor model can be established. If we also assume that two goods, namely a
manufacturing good using labor and capital (but not land), and an agricultural good using land
and labor (but not capital), labor will move between the two sectors until the value of the
marginal product of labor in each sector is equal to its wage rate.
This model is described by a beaker-shaped diagram in Figure 1. The two vertical axes indicate
the wage rates in the urban manufacturing sector and rural agricultural sector respectively. The
total labor force is represented on the horizontal axis. While manufacturing employment is
measured from left to right, rural agricultural employment is measured from right to left. Two
negatively sloped demand curves for the labor in the two sectors, Dm and Df, are determined by
the marginal productivity of the labor employed in the two sectors respectively. The
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
equilibrium wage rate and employment (Le and We respectively) will be reached when the
marginal productivities of labor in the two sectors (Dm and Df) are equalized.ii
In terms of owners of different productive factors that earn income, there are four classes of
income earners in the model: namely the owners of capital, urban manufactured labor, rural
agricultural labor, and the owners of land. Each group receives an aggregate income of triangle
A, rectangular B, rectangular C and triangle D in the figure respectively.
Assuming now that .an open door policy will lead to an increased external demand for the
manufactured goods which represents the country‟s comparative advantage, the demand curve
for manufactured goods will be shifted to the right. This is displayed as adding a new demand
curve Dm‟ in Figure 2 which will result in an increase in the nominal wage rate from We to We‟,
and urban manufacturing employment from Le to Le‟, whereas the rural employment falls by the
same amount.
In terms of the change in real income, the owners of capital gain the most from the original
triangle A in Figure 1 to an enlarged triangle E in Figure 2. This is followed by the urban
manufactured labor and rural agricultural labor when the nominal wage rate is increased. The
owners of land, however, become net losers because their income actually falls from triangle D
in Figure 1 to contracted triangle G in Figure 2. This welfare change, known as the
„Magnification Effect‟ is well documented (see Jones 1971, 1975, Carbaugh, 2011, among
others)
Applying this model into China‟s practice, the following propositions can be derived:
1) When an export promotion policy is adapted, the owners of capital, which are more
likely to be the state owned enterprises and foreign enterprises gain the most, at the
expense of owners of land and rural agricultural labor who are more likely to be the
losers. iii The urban manufacturing labor and migrants will also gain when urban
manufacturing employment increases.
2) When RMB appreciates, the external demand for manufactured goods is falling because
now its price is dearer. As a result, the above process reverses. This is because the
appreciation of RMB will reduce external demand for the exportable manufactured
goods, and shift the demand curve to the left. As a result, the owners of land are more
likely to gain while owners of capital lose.iv
The consequence of RMB appreciation on the return to different factors of production will be
more complex when there are more than two specific factors such as natural resources in the
model. The final result will depend on how the RMB appreciation affects the final demand for
several goods. Although a complete mathematical model could also be development for the
purpose of conducting some comparative static analysis, we alternatively choose running
simulations in an applied general equilibrium models (CGE) model.
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
Figure 1 The Specific Factor Model
Wm
Wf
Dm
Df
We‟
A
W
D
e
B
C
L
f
L
L
e
m
Figure 2 The Impact of Free Trade
Wm
Wf
Dm‟
Dm
Df
E
A
G
We‟
D
W
e
B
F
L
L
m
e
C
Le‟
L
f
Before a CGE model is chosen, we collected some statistical data from China‟s official
statistical yearbooks. After organising and analysing the raw materials, we identified the
following stylist facts:
Firstly, economic growth rates rate has been extremely high in the last three decades in China,
but unbalanced in China. While the average annual growth of GDP, agriculture, manufacture
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
and service sectors is about 10.5%, 4.5%, 11.6% and 11% , respectively between 1986 and
2011, the growth rates of exports and imports are both at a double digit of 16.8% and 17.2%
respectively, which are much higher than the growth of all other sectors.
Secondly, there is a dramatic structural change in the three fundamental sectors of agriculture,
manufacture and service over the last three decades. While the share of agricultural sector fell
from 25% to about 10%, the shares of manufacturing sector and service sector increased from
43.7% and 38.6% in 1986 to 46.4% and 43.6% in 2011 respectively.
Thirdly, although the income gap between the rural and urban sectors enlarged, the gaps in
wage income, after reasonable adjustment, converged over time. When the gap in disposable
income enlarged from 2.2 in 1990 to 3.2 in 2010, the gap in wage rate between the two sectors
narrowed from more than 8 folds larger in 1990 to about 5.6 folds larger over the last two
decades. During the same period, the gap in the return of property income enlarged by 6 folds
over the same period.
Fourthly, when the urban employment increases substantially, the rural employment declines
persistently in terms of both the number of employees and their shares in total employment.
With a continued decline in the numbers of agricultural employment by 20% and a dramatic
increase in urban labor force by 35% during the decade of the 2000s, the real wage rate was
increased substantially with an annual growth rate of 12.5%, which is higher than the growth
rate of GDP of about 10% over the same period.
Finally, despite wage income still accounting for a significant share of total disposable income,
other sources of incomes, namely income from household operation, income from properties
and income from transfers, enlarged in urban China but contracted in rural China. It is
observed that while the share of wage income on total income increased substantially from 20%
in 1990 to 41% in 2010 in the rural sector, the same item fell from more than 76% to less than
72% in the urban sector over the same time period. The change of incomes from household
operation and properties also moved in opposite directions between the two sectors. While the
share of these incomes on total income increased from 2% in 1990 to over 10% in 2010 in the
urban sector, it fell from 86% to 70% in the rural sector over the same time period.
Although the liberalizations in China‟s markets are still far from perfect, the pattern of income
distribution has changed dramatically. The evidences in China‟s experience over the last two
decades seem to support most of our theoretical propositions. This give us confidences in using
more rigorous applied economic models such as the Global Trade Analysis Project (GTAP)
model to stimulate some policy consequences with more details.
Since the real world situation is always more complex than what a theoretical model can
predict, the net impact of RMB appreciation on the pattern of income distribution cannot be
identified without a quantitative assessment underpinned by a multi-national and multi-sector
general equilibrium framework. To carry out such an analysis, a well-known computable
general equilibrium model, the GTAP model, is used in this study.
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
3. Methodology
A key question of the RMB appreciation is how and to what extent the appreciation will affect
regional specialization and comparative advantage, and income distribution among owners of
different factors of production, not only in China but also in the rest of the world. Specifically,
which group(s) benefits while the others suffer from the RMB appreciations, and to what extent
will the benefits or damages be distributed across different industries and sectors? These
questions cannot be answered without some quantitative assessment.
With the help of CGE models, all these gains and losses can be quantitatively assessed. For
instance, using a revised GTAP model, Yang et al (2012), and Mai and Peng (2009) report that
when rental, investment and employment falls as a result of falling demand for China‟s
exportable goods when RMB appreciates, the real wage for labor increases by more than 4%.
However, Meng et al (2013) tell a different story of falling in factor payments for all of the five
factors of production, when a different modeling method of the RMB appreciation is adapted.
Using a similar methodology but focusing to its domestic production and income distribution
issue, this paper incorporates RMB appreciation by assuming changes in the prices of both
exports and imports as an approximation of the RMB appreciation. Different from early studies,
a newly released dataset which is based on 2007 data of the world economy is used for the
simulations. The world economy is disaggregated into ten regions and ten sectors to capture the
regional and sectoral impact of the change. The method of the disaggregation is detailed in the
Appendix.
Given the fact that there is no explicit exogenous variable for the exchange rate, approximation
must be adapted. Since the appreciation of a currency will ultimately change the prices of both
exports and imports for the corresponding country, the price change of the tradable goods is
analogous to an increase in the tariffs of the country‟s exports and a decrease in the price of the
country‟s imports, The changes in real exchange rate of the RMB is represented by changing
the prices of the good and services that across the Chinese border. To examine the effects of a
real appreciation of the RMB in 2007, the year that the GTAP data is based, we simply shock
the model by making a change of the tariff rates of both the Chinese exports and imports to
affect the prices of the bilaterally traded goods by 10%. After the shock, the price of China‟s
imports from other regions is 10% cheaper while the price of the Chinese exports into the other
countries is 10% dearer.
4. Simulation results
The results concerning the impact of a 10% real appreciation of the RMB on several key
economic variables are summarized in the following tables and the details of the changes at
sector levels for each region are available upon request.
4.1
Changes in regional GDP, exports and imports
The changes in regional GDP, international trade (exports and imports), current account and the
terms of trade, along with a welfare variable of equivalent variation (EV) for the ten regions are
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
reported in Table 1.v It is clearly shown in the table that when GDP, trade and current account
fall significantly in China, these variables move in the opposite direction in all other regions
except for the external trade figures in North America, which includes both the US and Canada,
and the imports in some Asia-pacific countries. This consequence is acceptable because when
the Chinese exports are reduced due to the RMB appreciation, vacancies are created in these
country‟s markets which may not be quickly filled in the short run.
The gains for all other regions, however, do not automatically generate economic welfare for
the world as a whole because these gains are more than offset by the heavy lose in China. As a
result, the net welfare impact for the world as a whole indicated by the sum of the EV, is
actually a negative figure US$10.9 billion.
Table 1: Changes in Value of Regional Macroeconomic Variables
Region
GDP
Exports
Imports
%
-0.26
-0.24
-0.6
-0.27
Current
Account
US$m
1374
-69471
7224
10197
Terms of
Trade
US$m
ANZ
China
Japan
EastSE Asia
%
1.11
-12.92
1.16
1.74
%
0.41
-5.7
0.37
0.34
South Asia
1
North
America
EV
1.35
-10.26
1.93
1.6
US$m
2433
-129567
12252
23202
0.41
-0.06
1394
1.07
3132
0.89
-0.4
-0.7
11364
1.31
32508
South
America
0.79
0.69
0.11
5063
0.73
4396
EU_25
Africa
Rest of
World
0.87
1.07
0.96
0.53
0.46
0.54
0.16
0.06
0.07
21499
2325
9033
0.51
0.87
0.73
26949
4374
9417
It is interesting to note that although with different treatment of the exchange rate and using
different database, our simulation results are similar to those reported by Zhang and Fung
(2006), among others.
4.2
Changes in output in the industry level
To explore the effect of RMB appreciation in both China and the rest of the world further,
changes in production in different industries and in different regions are also examined. The
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
results are reported in Table 2. The regional economy is divided into ten sectors, in addition to a
capital good sector.
Table 2 Changes in Output in Different Industries
Sector
ANZ
China
Japan
EastSE
Asia
South
Asia
North
South
America America
EU25
Africa
Rest
of
World
Grain and
Meat
Extraction
Processing
Food
Textiles and
apparel
Light
Manufactures
Heavy
Manufactures
Dwelling
Utilities
Transportation
Services
Capital Goods
-0.28
-0.47
-0.45
-0.27
0.04
0.3
0.04
0.02
0.05
0.03
-0.08
-0.04
0.66
-1.16
-0.42
0.21
-0.25
0.3
-0.02
0.11
-0.16
0.32
-0.01
0.07
-0.08
0.11
-0.1
0.1
-0.06
0.08
-1.12
1.93
-0.64
-1.15
-0.58
-0.26
-0.27
-0.42
-0.52
-0.69
-0.2
1.34
-0.41
-0.47
-0.26
-0.28
-0.1
-0.08
-0.26
-0.17
-0.47
2.01
-0.31
-0.34
-0.28
-0.62
-0.26
-0.24
-0.33
-0.22
-0.05
-0.03
0.01
0.12
-0.32
-0.84
0.45
0.64
-1.72
-0.63
-0.07
0.06
0.02
0.14
-0.46
0.22
0.07
-0.14
0.25
-0.1
-0.09
0
0.04
0.11
-0.21
-0.09
0.03
-0.02
0.12
-0.48
-0.25
0
0.08
0.1
-0.47
-0.31
0.04
0.03
0.11
-0.5
-0.2
0.09
0.06
0.15
-0.37
-0.19
0.05
0.03
0.14
-0.36
The results shown in Table 2 reveal a significant decrease in output in some industries which
are mainly agricultural based or service. The most suffering sectors in China are, in a
descending order in magnitudes, services, food processing, dwelling, capital goods, and grains
and meat, when other industries particularly the heaving manufactures, and textiles and clothing
expand.
The output change in other regions is mixed. An interesting phenomenon is that the RMB
appreciation does not have any negative impact on China‟s industrialization because the figures
show that when the manufacturing activities are expending, these activities are contracting in
the rest of the world. For the service sector, the direction of change is reversed. It seems to
suggest that the fall in GDP growth after drastic RMB is more likely to be a pricing
phenomenon which will not alter the fundamental industry structure but the terms of trade
between China and other regions (see Table 1).
4.3 Changes in income distribution
The result on income distribution after the real RMB appreciates for 10% is displayed in Table
3. It is clearly shown in the table that the economic impact on income distribution is so bad that
the rate of returns in four of the five factors of production, namely the owners of land, skilled as
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
well as unskilled labor, and capital are all falling, with the only winner of the owner of natural
resources, gains significantly. While the owners of land and unskilled labor in China may be
attributable to the same entity, namely famers in the rural sector, this will reinforce the already
deteriorated income inequality in China further.
Table 3. Changes in income distribution in different regions
Factor
ANZ
China
Japan
EastSE
Asia
South
Asia
North
America
South
America
EU25
Africa
Rest
of
World
Land
Un
Skilled
Labor
Skilled
Labor
Capital
Natural
Resources
-0.94
0.05
-2.14
-0.24
-1.52
0.08
-1.09
0.26
0.23
0.04
1.1
0.02
0.16
0.03
0.07
0.01
0.25
0.11
0.16
0.06
0.11
-0.92
0.09
0.36
0.09
0.05
0.08
0.05
0.17
0.12
0.05
-0.51
-0.17
2.98
0.07
-1.72
0.26
-1.34
0.03
0
-0.01
-1.11
0.02
-0.06
0.02
-0.43
0.06
-0.61
0.05
-0.41
The consequence of RMB appreciation on income distribution for the other regions in the world
economy is mixed. While owners of land lose in Asia and Australasia, their counter-parts in
other part of the world including in South Asia countries benefit. The owners of natural
resources lose elsewhere, while they gain overwhelmingly in China. The owners of labor, both
skilled and unskilled, along with the owners of capital in all other regions, benefit from the
RMB appreciation.
5. Conclusion
Based on a brief review over the issue of how trade liberalization in general and RMB
appreciation in particular affect economic growth and income distribution, this paper attempts
to examine the economic impact of a drastic RMB appreciation on not only the Chinese
economy but also in the rest of the world. By simulating an approximation of a real RMB
appreciation of 10%, the theoretical projection in change of economic welfare and the
consequential redistribution of national income are conditionally confirmed. Specifically, it
discovers that a drastic appreciation of the RMB is disastrous for the Chinese economy for its
negative impact on production, international trade and income distribution. While the miracle of
high economic growth which has been maintained for almost three decades in China could be
seriously disrupted, the pattern of income distribution deteriorates in a way that . As a result,
when the owners of natural resource intensive industries particularly energy and minerals
benefit from the RMB appreciation, the remaining four of the five productive factors, namely
the owners of labor, capital and land, are all suffering from a fall in their real rate of return. This
consequence we derived from simulation is vividly imaging what has been happening in the
real economy of China over the last decade.
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Proceedings of 7th Global Business and Social Science Research Conference
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The impact of RMB appreciation on the rest of the world is just on the opposite. While modest
gains in production and trade are obtained by almost all other regions, the Northern American
countries particularly the US as the biggest trade partner of China lose somewhat in external
trade. More importantly, when the natural resource intensive sector suffers, owners of other
four productive factors particularly labor gain. This tradeoff in functional income between
China and the rest of the world, nevertheless does not mean the world as a whole benefits. In
fact, the net overall welfare change is negative for the world. This seems to suggest that some of
the advantages may be taken away from their efficient allocation of resources when a drastic
RMB appreciation occurs.
Although still very tentative, the findings of this paper have some important policy implications
for both China and the rest of the world. Firstly, a drastic RMB appreciation may lead to a hard
landing for the Chinese economy so it should be necessarily avoided. Secondly, since the RMB
appreciation and factor price may move in an opposite direction, a drastic RMB appreciation is
not in the interest of the Chinese people, so long as a high economic growth rate and a better
pattern of income distribution are setting as a combined goal for them to achieve in the future.
Thirdly, to switch from an export oriented economy to a one that mainly focuses on domestic
consumption through RMB appreciation may more problems than it could solve. Since RMB
appreciation has some negative impact on income distribution, some complementary policies
including perhaps expansionary fiscal policies must be implemented along with the appreciation
to eliminate the negative impact. In the case of China, since it is more likely that the farmers
who are combined owners of both land and labor in the rural sector and working class in the
urban sector lost the most, the Chinese government may need to implement some corresponding
policies targeting at increasing disposable income for these suffering income groups during the
process of RMB in the future.
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Proceedings of 7th Global Business and Social Science Research Conference
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
Appendix: The Aggregation of Regions and Sectors (gtap10_10)
Table A1, The aggregation of the ten regions
No.
Region code
Comprising economies
Description
1
ANZ
Australia, New Zealand
Australia and New Zealand,
2
China
China
China
3
Japan
Japan
Japan
4
EastnSEAsia
East & SE Asia
All other countries in Asia
except those in
South Asia
5
South Asia
South Asia
India, Pakistan, Bangladesh,
Nepal, lka xsa
6
US&Canada
South America
US & Canada
7
North America
South America
8
EU-25
European Union
The 25 EU countries in
2007
9
Africa
Africa
All countries in Africa
10
ROW
Rest of the World
All other countries
that are not included in the 9
groups
14
All countries in America
except US and
Canada
Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
Table A2. The aggregation of the ten sectors (gtap10_10)
No.
Sector Code
Comprising industries
Description
1
Food
Paddy rice, wheat, cereal
grain, vegetable, fruits, nuts,
oil seed, beet, crops, cattle,
sheep, goat, horses, animal
product, fishing, meat, dairy
product, plant-based fibbers,
wool, silk-worm cocoons,
forestry, sugar cane,
Primary production,
land and
resource
intensive goods
2
Extraction
Mining and Extraction
Coal oil gas etc.
land and resource
intensive
3
Processing food
sugar, milk, beverage and
tobacco,
Labor intensive
4
Textiles
Textiles and apparel
Labor intensive
5
Light manufacture
Leather lumber etc.
Labor intensive
6
Heavy manufacture
Chemical, oil processing etc.
Capital intensive
7
Dwelling
Dwelling & construction
labor intensive
8
Utility
Electricity, gas distribution,
water,
Labor intensive
9
Transport Communication
trd otp wtp atp cmn
Capital intensive
10
Other service
ofi isr obs ros osg
Labor intensive
i
The Magnification effect shows that trade liberalization will actually make the locally-scarce factor of production
worse off because increased trade makes the price index fall by less than the drop in returns to the scarce-factor
induced by the Stolper–Samuelson theorem. This has implications to both labour and capital.
ii
A more realistic dual economic model of the Lewis-type may incorporate the concept of surplus labor. In this
case, the initial equilibrium is reached when the marginal productivity of labor in the urban manufacturing sector
and the average productivity of rural labor in the rural agricultural good sector are equalized. This setting of the
labor market is based on a well observed fact in developing countries that when a capitalist marketing mechanism
dominates the production and employment pattern in the modern sector, the rural sector remains as a traditional
community where income is shared among all of the members. The income has to be shared because the supply of
labor in the rural traditional society is virtually unlimited. When some of the surplus labor is removed from the
rural sector, the output in the sector does not fall at all. In fact, when the surplus labor migrates from the rural
agricultural sector into the urban manufacturing sector, the overall productivity of labor could even increase. It is
hypothesized that this is exactly what has happened in the Chinese labor market since the late 1980s.
iii
Rural labor force may also gain somewhat when the nominal wage rate is increased. However, this gain will be
more than offset by the fall in the rental income also received by them as farmers.
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Proceedings of 7th Global Business and Social Science Research Conference
13 - 14 June, 2013, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-26-9
iv
If we take the Chinese farmers as both the owners of land and rural agricultural labor, the net impact on them is
undetermined because the gain derived from increasing rent cold be more than offset by the lose in real wage rate
for the rural labor and migrants.
v
Equivalent variation (EV) is a welfare measure of how much more money a consumer would pay before a price
increase to avert the price increase.
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