Question

Suppose that caviar is a leading export from Sweden - Swedish firms sell it all over the world. The country finds that caviar has decreased in price on the world market due to an increase in production from Russia. Firms in Sweden find that they cannot sell as much caviar as usual. The Swedish also produce something called cloudberries that are only eaten in Sweden - no one else in world eats them. Due to news reports linking eating cloudberries to decreased heart disease, the demand for cloudberries is increasing in Sweden.

In situations like this, a market system would increase the pay to cloudberry pickers due to the higher demand. It would decrease the pay to fishermen since caviar is less valuable. Explain what happens if collective agreements using the EFO model are used in Sweden to determine wages. Where will we see shortages and surpluses of labor? Explain why using these terms in your reply: exposed sector, protected sector, wage solidarity, inflexibility.

Answer 1

- As per the EFO model a comparable pay for wage float will happen in the Scandinavian model, the EFO-model in Sweden. Wage increments in the uncovered area are spread to the protected division by prudence of the market instrument and relative wage inclinations.

- In this given case Sweden’s ability to produce a cavier at a relatively lower cost than other goods it produces, has been impacted and rather now it has comparative advantage in producing a cloudberries since its opportunity cost of producing that cavier is less than that of its trading partner.

- It has the lower opportunity cost and thus a comparative advantage in the production of cloudberries

- In market system would increase the pay to cloudberry pickers due to the higher demand. It would decrease the pay to fishermen since caviar is less valuable.

- The supply of the labor will be seen in the cloudberries because it needs to be protected and improved whreas the cavier need not be protected and will see shortage of the labor. If the adminstrations try to intervenue and be inflexible the overall trade will suffer.