Trade and Real Wages: a Macroeconomic Model *

Ravi Batra and Hamid Beladi

Review of International Economics, 2007, vol. 15, issue 2, pages 243-251

Abstract: We offer a new paradigm to understand the effects of trade on factor rewards. It utilizes the classical-Keynesian model, and shows that normally a country's trade deficit hurts labor by lowering the real wage, but benefits the owners of capital. The effects of tariffs on factor rewards and employment are opposite to those of the trade deficit, which falls with a rise in the tariff rate. Countries with trade shortfalls unambiguously benefit from their tariffs, because laborers far outnumber capitalists, who suffer from the declining interest rate. Thus, tariffs lead to a rise in social welfare in trade-deficit countries. Copyright © 2006 The Author; Journal compilation © 2007 Blackwell Publishing Ltd.

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