Question

If openness to trade does not a¤ect relative prices at home, explain how does trade a¤ect real wages at home?

Answer 1

This is linked to the the Hecksher Ohlen theorem, which you may have studied. As countries trade, the country with comparative advantage in Capital, will tend to specialise in production of capital intensive goods, thereby increasing the returns on that factor, as a result the returns on another competing factor, i.e. labour would reduce. Once returns on labour fall, the amounts being paid for labour, i.e. Wages will also fall. Similarly, it works for coparative advantages in Labour intensive goods.

This is the reason how trade affects the real wages and you would often see Labour groups, sometimes opposing trade with developing contries, seeking protection etc.