This assumption is based on the idea that all economies trade on the open market

This assumption is based on the idea that all economies trade on the open market

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This assumption is based on the idea that all economies trade on the open market. If a  country that lags in productivity produces a good to sell on the international market, it  must price the good at the same level that more productive countries. In this case, the  only way for the lagging country to produce the good at a low price is to pay labor a low  wage. Thus, if labor receives a low wage, the workers are unable to provide or enjoy a  high standard of living.  Let's work this out through an example. Say that there is an international market for  widgets. The going price is $5 per widget. Most productive countries are able to produce  widgets and sell them for this price. One country, which is lagging in productivity, can  only produce widgets at half the speed of the other countries. But, because the lagging  country is only able to sell widgets at $5 each, it must reduce its costs of production. 
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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