Chapter 34: Problem 4

Explain how trade barriers raise wages in protected industries by reducing average wages economy-wide.

Short Answer

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Trade barriers raise wages in protected industries by reducing competition from foreign producers, allowing companies to increase their prices and profits. However, they also lead to inefficiencies, higher prices for consumers, and reduced export opportunities, resulting in a decrease in average wages across the entire economy.

Step by step solution

Define trade barriers

Trade barriers are measures taken by governments to restrict imports of goods and services from other countries. These can include tariffs, quotas, export restrictions, and other forms of protectionist policies. Trade barriers can protect domestic industries from foreign competition, allowing them to charge higher prices and pay higher wages.

Effects of trade barriers on protected industries

When a government imposes trade barriers, it creates artificial advantages for domestic industries by raising the cost of imported goods and reducing competition from foreign producers. As a result, protected industries can charge higher prices for their products, which allows them to increase their profits. In turn, this increased profitability can lead to higher wages for workers in these industries. In other words, trade barriers tend to raise wages in protected industries by sheltering them from foreign competition.

Trade barriers and average wages economy-wide

While trade barriers raise wages in protected industries, they also have negative consequences for wages in the broader economy. By raising the cost of imported goods and protecting certain industries, trade barriers can lead to inefficiencies in the allocation of resources. This can result in higher prices for consumers and reduced overall output in the economy. Furthermore, trade barriers can cause other countries to retaliate with their own protectionist measures, leading to reduced export opportunities and a decline in demand for domestically produced goods. The overall effect of these factors is a decrease in average wages economy-wide, despite higher wages in the protected industries.

Conclusion

In conclusion, trade barriers can raise wages in specific protected industries by reducing competition from foreign producers, allowing companies to increase their prices and profits. However, these policies can also result in inefficiencies, higher prices for consumers, and reduced export opportunities, which can lead to a decrease in average wages across the entire economy.

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