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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

Trade has income distribution effects. For example, suppose that because of a government-negotiated reduction in trade barriers, trade between Germany and the Czech Republic increases. Germany sells house paint to the Czech Republic. The Czech Republic sells alarm clocks to Germany. Would you expect this pattern of trade to increase or decrease jobs and wages in the paint industry in Germany? The alarm clock industry in Germany? The paint industry in Czech Republic? The alarm clock industry in Czech Republic? What has to happen for there to be no increase in total unemployment in both countries?

To determine

The change in number of jobs and wages in the paint and alarm clock industries in Germany and Czech Republic, given the trade pattern between the two countries is to be determined along with the conditions for no change in unemployment in both the countries.

Explanation

International trade is the exchange of goods and services across borders. International trade raises the production potential of a country since it helps firms and labor to exploit their comparative advantage. Workers who are more productive are more desirable in the labor market. Thus, the demand for labor increases leading to increase in the average wages in the labor market. Although trade increases the level of average wages in the economy, it does not mean an increase in wages of every worker. It is because trade benefits some and hurts some.

This can be explained as follows.

We are given the following pattern of trade between Germany and Czech Republic. Germany has comparative advantage in house paints and thus exports house paints and imports alarm clocks. Czechhas comparative advantage in alarm clocks and thus exportsalarm clocks and imports house paints.

Now, trade increases the production of the good that the country is exporting because export demand of that good increases. Thus, the derived demand for labor in the industry of the export good also increases...

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