Question

foreign faces a lower relative price qc because they will import qc. assuming qc is k-intensive and qf is l-intensive, what should happen to the real wages in terms of each good?

Answer 1

The foreign price effect can affect the real wages in terms of different goods depending on their capital and labor intensity.

Step-by-step explanation:

The foreign price effect states that if prices rise in the United States while remaining fixed in other countries, goods in the US will be relatively more expensive compared to goods in the rest of the world. This will lead to a decrease in US exports and an increase in imports. In terms of real wages, the impact will depend on the specific industries and factors of production involved.

In the given scenario, if the good qc is K-intensive and qf is L-intensive, it means that qc relies more on capital (K) and qf relies more on labor (L).

If the relative price of qc decreases due to imports, the demand for qc will increase, leading to an increased demand for K (capital) and a decrease in the demand for L (labor). As a result, the real wage for K-intensive industries may increase, while the real wage for L-intensive industries may decrease.