Lecture_8_post - 9/19/2008 The Terms of Trade The price of...

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9/19/2008 1 Lecture 8 Economics 3610 Cornell University Fall 2008 The Terms of Trade The price of a country’s exports divided by the price of its imports. For Home, P W /P C is their terms of trade. An increase in P W or a fall in P C will raise Home’s terms of trade terms of trade. An increase in the terms of trade is good for a country: it makes it better off. A country will earn more for its exports. A country will pay less for its imports. For Foreign, P C /P W is the terms of trade and a higher relative price for cloth is better. However, we have not yet determined the level of wages across countries. Relative prices converge. Do wages? Wages do rise in each country, but they do not converge. They are determined by absolute advantage, not comparative advantage. Solving for Wages In competitive labor markets, firms pay workers the value of their marginal product. Since Home produces and exports wheat, they
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Lecture_8_post - 9/19/2008 The Terms of Trade The price of...

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