In the Ricardian model, trade occurs based on comparative advantage because the 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 (Krugman et al., 2018). 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 used to produce these two goods. However, the relative labor productivity and output produced per unit are different, and the countries for each good differ. 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 goods, and the relative labor productivity in each country determines the relative price of the goods in each country (Krugman et al., 2018). 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 labor, which has lower labor productivity in cloth production. The concept is via versus for food.

If the foreign country has a higher relative productivity of labor in food production than the home country, then the foreign country has a lower relative price of food than the home country. Therefore, the equilibrium relative wage of the Home’s workers is determined by the relative prices of the goods. If the relative price of clothing is higher at home than in foreign countries, home workers will earn higher wages. This means that home workers are more productive in cloth production and earn higher wages because of the high price of clothing in the home. If the relative price of food is higher in Foreign than in Home, then foreign workers will earn higher wages than home 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 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 et al., 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.