Germany produces agricultural and manufactured products. When Germany engages in free trade, it starts exporting manufactured products. What are the predictions of the Ricardian model on changes in the real wage? Group of answer choices None of the other three options Real wage increase in manufacturing sector and decrease in agricultural sector Real wage decrease in manufacturing sector and increase in agricultural sector Real wage are not affected by the transition to free trade
Question
Germany produces agricultural and manufactured products. When Germany engages in free trade, it starts exporting manufactured products. What are the predictions of the Ricardian model on changes in the real wage?
Group of answer choices
None of the other three options
Real wage increase in manufacturing sector and decrease in agricultural sector
Real wage decrease in manufacturing sector and increase in agricultural sector
Real wage are not affected by the transition to free trade
Solution
The Ricardian model of trade, developed by David Ricardo, suggests that countries should specialize in the production of goods and services they can produce most efficiently and trade for those they can't. In this case, Germany is specializing in the production of manufactured goods, which it is exporting.
According to the Ricardian model, when a country like Germany specializes in a particular sector (in this case, manufacturing), the real wage (or purchasing power) in that sector would increase. This is because the demand for labor in the manufacturing sector would increase as Germany produces more manufactured goods for export. As a result, firms would be willing to pay higher wages to attract labor.
On the other hand, the real wage in the agricultural sector would decrease. This is because as resources (like labor) are moved away from agriculture to manufacturing, the supply of agricultural goods decreases, leading to a decrease in the demand for labor in the agricultural sector, and hence a decrease in the real wage.
So, the correct answer is: "Real wage increase in manufacturing sector and decrease in agricultural sector".
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