Question

In the trade scenarios you have dealt with so far, wages are left out of the picture. Thus, even after completing some of the exercises in the textbook, you might still retain the incorrect belief that a rich country cannot possibly gain from trade with a low-wage country. So let's consider wages, just as Ricardo did. The authors of this article assume Portugal's wage is set at 1, then they investigate which wages in England would give rise to beneficial trade agreements between the two countries. So, first question: Would England and Portugal both agree to trade with each other if England's wage is also w = 1 = 100/100? Why or why not?

Now suppose that England's wage is w = 0.75 = 90/120. Would the two countries agree to trade with each other now?

Explain why the two countries will not agree to trade if England's wage is w = 0.5 = 60/120.

https://www.google.com/url?sa=t&source=web&rct=j&url=https://pubs.aeaweb.org/doi/pdf/10.1257/jep.26.2.65&ved=2ahUKEwiq6cjD0MboAhXXW80KHe0iDXkQFjABegQIAhAK&usg=AOvVaw2RfRDb8iBo_z04avybJUQj&cshid=1585723598116

Answer 1

England is a richer country comapared with portugal. There are some limitations of free trade and rich countries can sometimes bear the brunt in extreme cases. Low wages tend to undermine the standard of living in the rich countries by exporting cheap labor or importing jobs and sometimes even an entire industry. If there were free immigration laborers from low wage countries would stream to countries with higher wages, ultimately driving down the wages in the richer nations. In essence, free trade does the same thing. Under free trade, the lower wage nations enjoy in the shorter run.

a) In the first case where the wages are equal, the two countries would like to trade with each other as the wages are the same and there would be no decline in wages of the richer country or loss of jobs in that region due to the availbility of cheaper labor. So, both the countries would like to trade with each other in this circumstance.

b) If England's wages reduce to 0.75, then since England's standard of living is a bit higher than that of Portugal's so the difference in the final prices of the goods and services would cancel out and the end result would be the same as a) since the final prices would be the same for both the countries. Hence, they would still trade with each other

c) When wages for England fall to 0.50, then Portugal would not agree to trade with England since the wage rate is half of what it is in Portual. keeping this in mind, we can conclude that if Portugal decides to trade with England then the wage rate in portugal would decline by almost half. This would mean a reduction in Income & Consumption for Portugal. Hence, it would not be a good bet for it.