Answer to Question #98627 in Macroeconomics for annie

Question

Greece is a country where the wages of the skilled workforce are relatively higher, compared with the wages of skilled workers in Germany and in Germany, the wages of unskilled workers are relatively higher compared with Greece. Assume there is no capital or labor mobility between Germany and Greece. However, Greece and Germany are trading openly. Assume after the economic crises, Greece had increased the tariff rates, which decreased the trade
between Germany and Greece significantly. How would this affect the wage and supply of the skilled labor relative to unskilled labor in Germany and Greece, both in the short run and in the long run?

Answer 1

In Greece, higher tariff rates will cause increasing prices for goods. As a result of rising prices for goods, over time, demand for them will decrease. Consequently, Greece will be forced to shrink some part of manufacturing , in the long run demand for labor will decrease (mainly due to unskilled workers). In this case, Germany will be able to expand its markets. In order to increase productivity with the existing labor resources, it will be forced to pay workers more, tariff rates for unskilled labor in Germany will increase.