Question

Explain how trade barriers raise wages in protected industries by reducing average wages economy-wide.

Short answer

Increasing wagesin protected industry but reducing wages everywhere else.

Step-by-step solution

Step 1. Introduction

Trade barriers refer to the restrictions imposed by the government on the trade of certain goods and services with the motive of protecting domestic consumers and producers. Tariffs, quotas, standards, etc. are examples of trade barriers.

Step 2. Explanation

When countries focus on their comparative advantage, everyone including workers can benefit from it. Workers can produce more output by focusing on things that have a comparative advantage. They can earn higher wages by producing more thus raising the average wage levels.

Trade barriers restrict the use of the comparative advantage. The workers in protected industries can have an advantage but other industries are harmed through reduced demands, the decline in wages, and job loss. Thus, the overall level of wages declines.