Let us define the real wage as the purchasing power of one hour of labor.In the Ricardian 2X2 model,if two countries under autarky engage in trade then
A) the real wage will not be affected since this is a financial variable.
B) the real wage will increase only if a country attains full specialization.
C) the real wage will increase in one country only if it decreases in the other.
D) the real wage will rise in both countries.
E) the real wage will fall under pressure of international competition.

Question

Quizplus · Accepted Answer

In the Ricardian 2X2 model, if two countries under autarky engage in trade, each country will specialize in producing the good in which it has a comparative advantage. This will lead to an increase in productivity and, therefore, an increase in the real wage in both countries. Thus, the real wage will rise in both countries.

Let Us Define the Real Wage as the Purchasing Power