UNIT 2

Productiviy and Wages in Ricardian

Theory

Professor: Álvaro de la Barra Croquevielle

August, 2023
 Productivity and Wages
-In competitive markets, the wages are the value of their marginal product.
• In our example of cars (c ), workers in the car sector are paid wc = Pc
/alc.

• If machines (m) are produced, workers in the machines sector are paid
wm = Pm/alm.

• With just one production factor, this is equal to marginal cost.

• As workers can freely move to sector with higher wage (this is the long
run), then
w = wc = wm, with a production of cars and machines.
 Productivity and Wages
-This implies that Pc /Pm = (alc/alm), if both cars and machines
are produced as in the case in autarky (and any other
incomplete specialization outcome under trade).

-In full specialization under trade, for example, in the

production of cars, wages are:

w = pc/alc
 Productiviy and Wages under
full specialization
-Suppose trade equilibrium where P ͥ > (alc /alm) and the country specializes in Cars.

Why is there no production of machines?

Workers in cars sector are paid w = p ͥc / alc > P ͥm/alm

-To be paid the same wages as in the Cars sector, workers in the machine sector would
have to be paid more than the value of their marginal product p ͥm/alm.

-In other words, it is always cheaper to import machines at the price of p ͥm than to
produce it at a cost of w alm > p ͥm per unit.
 Relative wages in the
Ricardian Theory
-Assume that the local and the foreign country are open to trade at the relative price P ͥ ,
and both countries are completely specialized. Local country in cars and foreign country
in machines. Then, (alc /alm) < P ͥ < (alc/alm)*,

so, w = p ͥc / alc and w* = p ͥm /alm*

Then,

w /w* = (p ͥc /alc) / (p ͥm /alm*) = P ͥ (alm*/ alc)

Then, relative wage (across countries) is determined by the terms of trade and the
absolute productivity advantage between the two countries (in the good that is
produced in each country).