Question

2. During the debate on NAFTA, The Economist (Sept 11, 1993, p.22) noted that average wages and fringe benefits in Mexican manufacturing industries were about one-fifth of those in U.S. manufacturing, and that U.S. output per worker was about five times that of Mexican manufacturing. (You do NOT have to look up the article to answer this question)

a) Were wages in line with productivity?
b) With free trade, which country would gain more according to the Classical model?
c) If the peso devalues, whose comparative advantage increases?

Answer 1

Productivity or output per hour is growing slowly, productivity is always depends up on wage line or a business figures out how to produce more efficiently and its productivity goes up.When Economists tick off the reason for our current wage problems, we usually include "slow productivity growth" on the list.

According to the view of Classical model with the free trade is more effected in different countries in different way.That means as trade benefits them ,they trade with each other.The gain from trade arises because of specialization in production and division of labour.Individuals specialize,firms specialize in in certain products.Same is true for the countries.That is why each country is interested in exchanging its own specialized products for non-specialized products.

Adam Smith says that the absolute cost difference   or absolute advantage is the basis of trade.But another Classical Economist like David Ricardo argued that when a step forward in 1817 to search the basis of trade in terms of comparative cost difference or comparative advantage.

Again Smith argued that in simple language when a country export a product in it has an absolute advantage and when its import it has an a absolute disadvantages.Meanwhile Ricardo says that a country will produce and export that commodity which it has a comparative advantages and will import that in which it has an comparative dis advantages

In these two arguements we understood that both method has its own advantages and disadvantages.Both are take their own risk and responsibilities while a product making and its export import functions .