International Trade Theory and Policy
by Steven M. Suranovic

Trade 70-17

Effect of Trade on Real Wages

We calculate real wages to determine whether there are any income redistribution effects in moving to free trade. The real wage formulas in the immobile factor model are the same as in the Ricardian model since perfect competition prevails in both industries. However, the wage paid to cheese workers no longer must be the same as the wage of wine workers. Cheesers' wages could be higher since wine workers cannot shift to the cheese industry to take advantage of the higher wage.

When the countries move from autarky to free trade, the price ratio in the US, , rises.

The result is a redistribution of income as shown in the Table. Cheese workers face no change in their real wage in terms of cheese and experience an increase in their real wage in terms of wine.


Changes in Real Wages (Autarky to Free Trade):
rises

In terms of

Real Wage of, Cheese Wine
US Cheese

Workers


no change

rises
US Wine

Workers


falls

no change

Thus cheese workers are most likely better off in free trade. Wine workers face no change in their real wage in terms of wine but suffer a decrease in their real wage in terms of cheese. This means wine workers are likely to be worse off as a result of free trade.

Since one group of workers realize real income gains while another set suffers real income losses, free trade causes a redistribution of income within the economy. Free trade results in winners and losers in the immobile factor model.

In France the price ratio,, falls when moving to free trade. The result is a redistribution of income similar to the US as shown in the Table. Cheese worker face no change in their real wage in terms of cheese and experience an decrease in their real wage in terms of wine.

Changes in Real Wages (Autarky to Free Trade):
falls

In terms of

Real Wage of, Cheese Wine
French Cheese

Workers


no change

falls
French Wine

Workers


rises

no change

Thus cheese workers are most likely worse off in free trade. Wine workers face no change in their real wage in terms of wine but realize an increase in their real wage in terms of cheese. This means wine workers are likely to be better off as a result of free trade.

Since one group of workers realize real income gains while another set suffers real income losses, free trade causes a redistribution of income within the economy. Free trade results in winners and losers in both the US and in France. In both countries the winners are those workers who work in the industry whose output price rises while the losers work in the industry whose output price falls. But because the price changes occur because of the movement to free trade, it is also true that the output price increases occur in the export industries in both countries while the price declines occur in the import-competing industries. Thus it follows that a movement to free trade will benefit those workers who work in the export industry and harm those workers who work in the import-competing industry.

International Trade Theory and Policy - Chapter 70-17: Last Updated on 9/16/99

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