ECON 202 Chapter Notes - Chapter 4: Autarky, Budget Constraint, Real Wages
28 Jun 2018
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Look at figure 4
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7 again, if the Pc rises by 7%, the demand curve defined by Pc x MPLc will also rise
by 7%
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Thus, if only cloth price rise by 7%, we would expect wage rate to rise by only say 3%
ā
Lets look at what this outcome implies for the income of three groups: workers, owners of
capital, and owners of land
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We have also seen that unless the price of food also rises by at least 7%, w will rise by less than Pc.
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Its hard to say whether they are better or worse off
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Workers have a higher wage rate, but less than in proportion to the rise in Pc. So their real wage in
terms of cloth (the amount of cloth they can buy with their wage income), w/Pc falls, but their real
wage in terms of food, w/Pf, rises.
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Pc in turn rises relative to Pf , the income of capitalist clearly goes up in terms of both goods.
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Owners of capital, are definitely better off. The real wage rate in terms of cloth falls, so the profits
of capital owners in terms of what they produce (cloth) rises. Their income will rise more than
proportionately with the rise in Pc
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The real wage in terms of food rises, squeezing their income, and the rise in cloth price
reduces the purchasing power of any given income.
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Landowners are worse off because
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The factor specific to the sector whose relative price increases is definitely better off
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The factor specific to the sector whose relative price decreases is definitely worse off
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The change in welfare for the mobile factor is ambiguous.
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In summary:
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For trade to take place, a country must face a world relative price that's different from the relative
price that would prevail in the absence of trade
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International trade in the specific factors model
RS be different from RSWorld because other countries could have different technologies and differ
in their resources: total amounts of land, capital, and labour available
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Correspondingly, consumers demand more food because its cheaper relative to clothā
At the higher relative price (Pc/Pf)2, the economy thus exports cloth and imports food
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The increase in the relative price from of cloth in terms of food from (Pc/Pf)1 to (Pc/Pf)2 induces
the economy to produce relatively more cloth
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In summary:
when opening up to trade, an economy exports the good whose relative price has
increased and imports the good whose relative price has decreased
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ECON 231 Page 9
Document Summary
Look at figure 4-7 again, if the pc rises by 7%, the demand curve defined by pc x mplc will also rise by 7% We have also seen that unless the price of food also rises by at least 7%, w will rise by less than pc. Thus, if only cloth price rise by 7%, we would expect wage rate to rise by only say 3% Lets look at what this outcome implies for the income of three groups: workers, owners of capital, and owners of land. Workers have a higher wage rate, but less than in proportion to the rise in pc. So their real wage in terms of cloth (the amount of cloth they can buy with their wage income), w/pc falls, but their real wage in terms of food, w/pf, rises. Its hard to say whether they are better or worse off.
