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Article
To integrate with a high- or low-wage country: That is the question
International Review of Economics and Finance
  • E. Kwan Choi, Iowa State University
Document Type
Article
Publication Version
Accepted Manuscript
Publication Date
1-1-2011
DOI
10.1016/j.iref.2011.02.003
Abstract
This paper considers the question of whether a country with the intermediate capital–labor ratio is better off forming a free trade area with the higher or lower wage country. Typical analyses of gains from trade ignore the effects of free trade on factor prices. When Europe forms a free trade area with a high-wage economy, the equalized wage rises and rent declines, while the price of the importable declines. Workers unambiguously benefit, but integration has an ambiguous effect on capitalists. However, consumers as a whole benefit from the integration and workers can more than offset the losses of the capitalists. On the other hand, Europe's integration with a low-wage economy raises rent but lowers the wage and the price of the labor-intensive good. Accordingly, capitalists unambiguously benefit, but integration has an ambiguous effect on workers. Again, welfare of all consumers rises and the capitalists can more than offset the losses of workers.
Comments

NOTICE: this is the author’s version of a work that was accepted for publication in International Review of Economics and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Economics and Finance 20 (2011), doi: 10.1016/j.iref.2011.02.003.

Copyright Owner
Elsevier Inc.
Language
en
File Format
application/pdf
Citation Information
E. Kwan Choi. "To integrate with a high- or low-wage country: That is the question" International Review of Economics and Finance Vol. 20 Iss. 4 (2011) p. 792 - 799
Available at: http://works.bepress.com/ekwan-choi/18/