Many analysts believe that China's currency (the yuan) is undervalued in real terms. China has been experiencing a high rate of productivity growth. What would you expect to happen to Chinese GDP and Chinese prices relative to U.S. prices if this pattern continues over time?
A) Chinese GDP will rise and Chinese prices will fall relative to U.S. prices.
B) Chinese GDP will rise and Chinese prices will rise relative to U.S. prices.
C) Chinese GDP will fall and Chinese prices will fall relative to U.S. prices.
D) Chinese GDP will fall and Chinese prices will rise relative to U.S. prices.

Question

Quizplus · Accepted Answer

If China continues to experience high rates of productivity growth, its GDP is expected to rise due to increased output and efficiency. As productivity increases, the cost of production decreases, leading to more competitive pricing internationally. However, over time, as the economy grows and demand increases, prices in China may start to rise relative to U.S. prices, reflecting the increased wealth and purchasing power within China.

Many Analysts Believe That China's Currency (The Yuan) Is Undervalued