Question

In the framework of the Ricardian Model of International Trade, prove that if a country’s workers earn a wage rate that is twice as high as that of another country, then it is because its workers are twice as productive. We know that American workers earn higher wages than Chinese workers do. Why do you think American workers are more productive than Chinese workers?

Answer 1

Ricardian Model is a general equilibrium model, and so it is a perfectly competitive market. This implies all the goods and factors of the two countries are the same other than labour. Hence labour productivity determines the edge here. Labour productivity measures the hourly output of a country's GDP. It depends on 3 main factors: saving and investment in physical capital, new technology and human capital.  

Let us assume a country's workers are given more training and are more specialised in their work as compared to another country. This implies the former has more human capital with respect to the latter. Thus, their wages will be more and more motivation to work thereby increasing their productivity further. Therefore we can prove that if a country’s workers earn a wage rate that is twice as high as that of another country, then it is because its workers are twice as productive.

American companies have a natural advantage of being the largest and the most competitive market in the world. This means that manufactured goods can have longer production runs, which reduces the unit cost per worker significantly. Also the companies are more productive because of the education standards of the work force, research and development costs, management structures and high precision engineering technologies.

American workers are earn more than Chinese because,

1. Americans are more productive than chinese workers - mainly because of the education and the technologies used by the companies.
2. they get the best employees across the globe, with the best talent and education hence need to be paid well.
3. there is a general acceptance that working in US is more safer and privileged than any other country. Government of US is more worker friendly as compared to chinese.
4. due to very high population in China, if someone is not satisfied with the salary they can be easily replaced with another one.
5. standard of living is cheaper in China
6. absence of regulations and labour unions in China

Thus improving human capital via training, skilling and mastering the employees can go a long way on productivity.