The Economics of $6.75 T-Shirt
Question 1.
The market reality of garment industry in Bangladesh is extremely hard – prices for production are so low that do not cover even a life-needed level of wages. Moreover, this situation (wages under life-needed level) is widespread all over the country. And the reason of this is that the level of demand for this type of products is much lower than supply. In fact, nearly 20 million people in Bangladesh are connected to garment industry, which makes it one of the key industries in country’s economy. Such a huge supply leads to lower prices of products they are producing. In this particular case, which is covered in the article, the price of T-Shirt indicated by producer is $6.75 including $5,75 on materials and rest $1 for rent and facilities (11 cents), wages (38 cents), marketing (11 cents), bank interests, etc. It is an example of situation to what any perfectly competitive industry is leading – more companies are compete, less profits they will get. I think that such low profitability is common for any industry that produces products with low value-added.
Question 2.
The article provides few evidences that garment industry in Bangladesh is perfectly competitive. The first evidence is that garment manufacturing is one of the most widespread industries in Bangladesh (so, there are numerous of small and medium firms that are no branded, and produce the same type of production). The second evidence is low level of profits. It could be evidence, because the industry is mature and well developed, with plenty of competitors, so low profitability is a result of high level of competition. All these signs are completely confirm the situation of perfect competition. But unfortunately, it leads to too many problems (especially with workers’ wages), so the industry faces the need of government intervention. I think that the government should react immediately, when problems of key industry affect the millions of lives.
Question 3.
The effects of wages’ increasing in Bangladesh are contradictory. On the one hand, government needs to react to the situation of extremely low wages in industry (lower than life-needed level), so increase of minimal wages looks as an obligatory action. But from other hand, higher wages will lead to higher price of products and it will be resulted in lower demand (and lower demand = lees workers are needed), because low salaries are key competitive advantage of the country. Garment industry is too important for Bangladesh economy to lose buyers. According to article, nearly 20 million of people depend on garment wages (and even with so low level of salaries, it is one of the highest in Bangladesh), so crisis in industry could be extremely dangerous for the whole country. Nevertheless, I think that government should raise a minimal wages even with short-term problems – it will stimulate development of industries with higher value added in long-term perspective.
Question 4
As for differences in average fixed and variable costs in T-shirts manufacturing, the situation is next: almost 85% of costs goes for materials; more 6% goes for wages. So, more of 90% of all costs for T-shirt is variable costs, and the rest goes for fixed costs. This situation is very common for low-valued productions. As the result, such kind of manufacturing leads to very low level of margin and low profits as well. And the reason of such low profitability is that costs are too correlated with the volume of production. T-shirts production is low-value added, so profits couldn’t be high. I think that country should shift for low value-added production of garment to some other innovative and high-technological productions – this is a key to successful development of the country.
