Question

Respond to the following in a minimum of 100 words:

Discuss how wages are determined according to economic theory OR discuss the pros and cons of international trade.

Answer 1

Pros of International Trade

• Transfer of technology. New technologies are used which can lead to improvements, cost saving and innovation.
• Increased employment. A result of the multiplier effect and increased export production.
• Comparative advantage.Specialising in goods that can be made more efficiently at lowest cost.
• Economies of scale. A narrower range of good allows countries to produce at higher volumes and lower costs.
• Purchasing power.Increased competition results in lower prices allowing consumers to buy more for their money.
• Exploitative and labour intensive industry
  Labour is the biggest cost in industry, particularly in manufacturing. Profits can be maximised if these costs are squeezed.

Cons

• Over-specialisation. Centres that are too specialised struggle to diversify when faced with competition or if the price for that product falls.
• Protectionism. A country may protect domestic industry by imposing additional tariffs on imported goods.
• Stunted growth or decline of local industry.Home-grown new industries will find it difficult to establish when faced with foreign competition, where costs are lower.
• Product dumping. It refers to exporting at a price lower in the foreign market than domestically.
• De-skilling. Traditional skills and crafts may be lost when technology replaces manpower.

Determination of Wages

According to economic theory, workers' wages are equal to the marginal revenue product of their labor. If one employee is very productive he or she will have a high marginal revenue product. Wages are determined by supply and demand factors, and in theory, workers should be paid a wage equal to their marginal revenue product (MRP). However there are certain assumptions of this theory like Labor markets are flexible.There is perfect information. The MRP is measurable.In reality, wages are determined not only by one's productivity, but also by seniority, networking, ambition, and luck. Some of the disconnect between performance and pay can be addressed with alternate pay schemes.