Question: What happens when Foreign improves its productivity? Suppose we start from a Ricardian trading situation with the Home country specialized in the production of good

What happens when Foreign improves its productivity? Suppose we start from a Ricardian trading situation with the Home country specialized in the production of good X and Foreign specialized in the production of Good Y. The world price is determined by the balance of trade.

Suppose now productivity increases 50 percent in both sectors in Foreign. Productivity stays unchanged in the Home country. What happens to real wages at Home?

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a. Home wages do not change

b. Home wages Fall

c. Home wages Rise

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