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Real wages and non-traded goods

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  • Jones, Ronald W.

Abstract

This paper examines the connection between a terms-of-trade improvement and the real wage rate for a country that is immersed in a trading world with many traded commodities as well as a non-tradeable. There is an array of commodities that are imported but not produced at home, and the price of one of these commodities is lowered, which would, by itself, raise real wage rates if local wage rates are tied to world prices with sufficient diversity in local production to tie factor prices to world commodity prices. If the improvement is sufficiently great, the home country may cease production of one of its tradeables, and the price of non-tradeables changes to clear its market. Details of how this affects the real wage rate depend upon two attributes: Is the non-tradeable labor-intensive relative to the remaining tradeable, and is the income effect of increasing the demand for non-tradeables overpowered by the substitution effect tending to reduce demand? Furthermore, with large changes new traded commodities enter the production mix, so that factor prices once again are tied to world prices. And a wealthier country with the same technology may find its real wage improving at the same time as the opposite change takes place in the home country.

Suggested Citation

  • Jones, Ronald W., 2012. "Real wages and non-traded goods," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 177-185.
    • Handle: RePEc:eee:reveco:v:21:y:2012:i:1:p:177-185
    DOI: 10.1016/j.iref.2011.06.001
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    References listed on IDEAS

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    1. Ronald W. Jones & Roy J. Ruffin, 2008. "Trade and Wages: a Deeper Investigation," Review of International Economics, Wiley Blackwell, vol. 16(2), pages 234-249, May.
    2. Wolfgang F. Stolper & Paul A. Samuelson, 1941. "Protection and Real Wages," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 9(1), pages 58-73.
    3. Kalyan K. Sanyal & Ronald W. Jones, 2018. "The Theory of Trade in Middle Products," World Scientific Book Chapters, in: International Trade Theory and Competitive Models Features, Values, and Criticisms, chapter 13, pages 203-231, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Ronald W. Jones, 2018. "On Blending Competitive Trade Models," World Scientific Book Chapters, in: International Trade Theory and Competitive Models Features, Values, and Criticisms, chapter 19, pages 319-361, World Scientific Publishing Co. Pte. Ltd..
    2. Yu, Eden S.H. & Chao, Chi-Chur, 2021. "Non-traded goods, firm dynamics and wages in a service economy," Journal of Asian Economics, Elsevier, vol. 76(C).
    3. Chao, Chi-Chur & Laffargue, Jean-Pierre & Sgro, Pasquale M., 2012. "Environmental control, wage inequality and national welfare in a tourism economy," International Review of Economics & Finance, Elsevier, vol. 22(1), pages 201-207.

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    More about this item

    Keywords

    Real wages; Non-traded goods; Terms of trade;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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