In the Ricardian model, trade occurs based on comparative advantage because comparative advantage is when a country can produce a good at a lower cost. We read that in the multi-good, single-factor Ricardian model, the equilibrium relative wage of Home’s workers can be determined by the relative price of the goods.

In this model, we can say that there are two hypothetical countries, Home and Foreign, with two goods, food and cloth and each country has a fixed factor of production which we sometimes term as labor is used to produce these two goods. But the relative labor productivity, the output produced per unit, is not the same or differs between the countries for each good. Indeed, this tells us that one country will have a comparative advantage in producing one good.

In contrast, the other country will have a comparative advantage in producing the other good, and the relative labor productivity in each country determines the relative price of the good in each country. For instance, if Home has a high relative labor productivity in cloth production compared to Foreign, then Home will have a lower relative price than Foreign.

Home can produce more cloth per unit of labor and sell it at a lower price than Foreign, which has a lower labor productivity in cloth production. The concept is via versus for food. If the Foreign has a higher relative productivity of labor in food production than the Home, then the Foreign has a lower relative price of food than the Home.

Therefore, the equilibrium relative wage of the Home’s workers is determined by the relative prices of the goods. If the relative price of cloth is higher at Home than in Foreign, Home’s workers will earn higher wages. It means that Home’s workers are more productive in cloth production and earn higher wages because of the high price of cloth in Home. If the relative price of food is higher in Foreign than in Home, then Foreign workers will earn higher wages than Home’s workers.

In general, the multi good, in the Ricardian model, suggests that the equilibrium relative wage in Home’s workers is often determined by the relative price of goods and also determined by the relative labor productivity in each good for each country. Again, the relative size of countries, the relative demand and supply of labor, and the relative demand for goods are essential factors in determining trade patterns and production levels.

However, they do not directly determine the equilibrium relative wage in the model (Krugman Obstfeld & Melitz 2018). Indeed, the Ricardian model’s relative demand for labor function shapes the downward-sloping curve, showing that the quantity demanded decreases as the wage rate increases.

Reference

Krugman, P., Obstfeld, M. & Melitz, M. (2018). International trade: theory and policy (11^th ed.). Pearson.