Question

1. Evaluate the following two statements. (1) The Ricardian model predicts wages across countries are correlated with labor productivity differences. (2) In the data there is a correlation between wages and productivity at the national level

A Both are true

B Both are false

C (1) Is false and (2) is true

D (1) is true and (2) is false

2. Does the Ricardian model imply that it is bad to trade with low wage countries?

A Yes, lower prices will not benefit high wage countries

B Yes, trade with low-wage countries will translate to lower wages at home.

C No, rich countries only sometimes lose when trading with poor countries.

D No, wages at home are reflective of the home country’s labor productivity.

E (A) and (B) are true

Answer 1

1) D (1) is true and (2) is false

The reason is that when productivity is increased, the average wage should increase because marginal product of labo and wage rate move simultaneously. But the claim is not well supported by data as between 1977-92, prodictivity increased by 30% while wages fell by 13%.

2) D) No, wages at home are reflective of the home country’s labor productivity.

Ricardian model refutes the argument that the competition that emerges from low-wage countries is implicitly bad. The model exhibitst that the only mobile factor is labor and so trade can be mutually beneficial which is irrespective of differences in wage rates.