Sunday, March 29, 2009

the Effect of wage Rate Changes

Expanding the number of commodities is useful extension of the basic Classical model because it permits an analysis of the effect of exogenous changes in relative wages or the exchange rate on the pattern of trade (In the two-country,two-commodity model,sufficiently large wage or exchange rate movements can remove the basis for trade,but if trade takes place ,it is always the same trade pattern) To drive This point home,suppose that an increased preference for leisure causes the U.K.this shift in relative wages means that Spain will now export cheese and hardware ,instead of importing them from the United kingdom .the pattern of trade has shifted markedly because the united kingdom is cost advantage has been eroded by increase in its wage rate ,which has eliminated its ability to export two products .if trade tasks place ,however ,cloth will always be exported by Spain and cutlery by the united kingdom.

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