Question

What happens to the pattern of trade if the level of wages in one country increases, other things being equal? If the price of foreign currency rises for the same country (i.e., its home currency depreciates in value)?

Answer 1

Soln. Increase in wage level benefits the trade in two ways. Firstly, increase in wage, results in production cost of the firm and to overcome the increased cost, firm has to increase the selling price. Increase in selling price, reduce the buying power of the consumer and hence results in reduction in supply quantity. If there is no adequate supply of goods for the consumer, country has to be dependent on trade to fulfill the supply and hence it leads to the increase in trade transactions.

If the price of foreign currency rises for the same country, domestic value of the currency depreciates, import will become more expensive and export would be cheaper. Hence, reduction in import and increase in export will lead to trade deficit, which will further result in surplus of goods.