The real wage is the purchasing power of one hour of labor. That is, for each product it is the number of units of the product that a worker can buy with his earnings from one hour of work. In a Ricardian model, for any product actually produced by the worker, the worker is simply paid according to her productivity (units of output per hour). This is then her real wage in terms of this product. In your answer to this question, use the numerical example from the section on Ricardo’s theory of comparative advantage.

a. With no trade, what is the real wage of labor with respect to each good in the United States? In the rest of the world? Which country’s labor has the higher “average” real wage?

b. With free trade and an equilibrium price ratio of 1 W/C , each country completely specializes. What is the real wage with respect to wheat in the United States? By using international trade to obtain cloth, what is the new value of the real wage with respect to cloth in the United States? What does this tell us about gains from trade for the United States? What is the real wage with respect to cloth in the rest of the world? By using international trade to obtain wheat, what is the new value of the real wage with respect to wheat in the rest of the world? What does this tell us about the gains from trade for the rest of the world?

c. With free trade, which country’s labor has the higher “average” real wage? In what sense does absolute advantage matter?