The African country Lesotho gains most of its export earnings—90% in 2000s—from its garment and textile factories. In 2007, the demand curve for Lesotho products shifted down steeply due to increased Chinese supply with the end of textile quotas on China and the resulting increase in Chinese exports and the plunge of the U.S. dollar exchange rate against its currency. Lesotho’s factories had to sell roughly $55 worth of clothing in the United States to cover a factory worker’s monthly wage in 2002, but they had to sell an average of $109 to $115 in 2007. Consequently, in the first quarter of 2007, 6 of Lesotho’s 50 clothes factories shut down, as the world price plummeted below their minimum average variable cost. These shutdowns eliminated 5,800 of the 50,000 garment jobs. Layoffs at other factories have eliminated another 6,000. Over this period, Lesotho has lost an estimated 30,000 textile jobs.
a) What is the shape of the demand curve facing Lesotho textile factories, and why? (Hint: They are price takers in the world market.)
b) Use figures to show how the increase in Chinese exports affected the demand curve the Lesotho factories face.
c) Discuss how the change in the exchange rate affected their demand curve, and explain why.
d) Use figures to explain why the factories have temporarily or permanently shut down. How does a factory decide whether to shut down temporarily or permanently?