Intuition of Real Wage Effects

by Steven Suranovic ©1997-2004

Trade 70-18  





When the US and France move from autarky to free trade, the US price of cheese rises and the US begins to export cheese. The French price of wine rises and France begins to export wine. In both of these industries the higher prices generate higher revenue and since profits must remain equal to zero because of competition in the industry, higher wages are paid to the workers. As long as the factors remain immobile other workers do not enter the higher wage industry so these higher wages can be maintained. Thus in both countries real wages rise for workers in the export industries.

The movement from autarky to free trade also causes the price of wine to fall in the US while the US imports wine and the price of cheese to fall in France while France imports cheese. Lower prices reduce the revenue to the industry and to maintain zero profit, wages are reduced proportionally. Since workers are assumed immobile, workers cannot flee the low wage industry and thus low wages are maintained. Thus in both countries real wages fall for workers in the import-competing industries.

Q? Isn't it possible for the owners of the firms in the export industries to claim all of the extra revenue for themselves?

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International Trade Theory and Policy Lecture Notes: ©1997-2004 Steven M. Suranovic
Last Updated on 9/16/99