Industrial Pay Inequality and International Trade

The assignment discusses international trade and its impact on industrial pay inequality in Brazil and the UK. The study finds that openness in trade is positively correlated with pay inequality in Brazil, while it has a negative correlation with pay inequality in the UK. The Stopler-Samuelson theorem suggests that tariff increases can lead to an increase in relative income of limited factors used in production, which may decline pay inequality. The correlation values between trade openness and industrial pay inequality show that trade liberalization may have decreased pay inequality in the UK but had a low impact on Brazil.

Running head: INTERNATIONAL TRADE
INTERNATIONAL TRADE
Name of the Student
Name of the University
Authors Note

1INTERNATIONAL TRADE
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
References........................................................................................................................................5

2INTERNATIONAL TRADE
Answer 1
Industrial pay inequality is generally attributes to the difference between the people in workplace
as well as inequity in labor market (Lim and McNelis 2014). This defines as the distribution of
income in indefinite in unequal way. The two nations for this study is Brazil and UK. The figure
below reflects the openness and Industrial pay inequality of these two countries.
1985
1986
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2005
0
0.1
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0.6
BRAZIL PAY INEQUALITY AND OPENNESS
PAY INEQUALITY
OPENNESS
YEAR
Graph 1: Graph showing Industrial pay inequality and openness of Brazil
Source: (Authors Note)

3INTERNATIONAL TRADE
1985
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0
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0.8 UK PAY INEQUALITY AND OPENNESS
PAY INEQUALITY
OPENNESS
YEAR
Graph 2: Industrial Pay Inequality and Openness of UK
Source: ( Authors Note)
Answer 2
Openness also known as trade openness refers to the economic communication or relations
between two nations that is mainly driven by trade liberalization , flow of investment and capital
and advancement of technologies. Trade openness is the main cause of consecutive rise in
inequality in wages between the persons in various areas (Jaumotte et al. 2013). Openness is
estimated by the ratio of nation’s trade to its GDP. The correlation between openness and trade
for Brazil yields a positive value . On the other hand, correlation index for UK reflects a negative
value. Thus, it can be stated that openness in trade might have direct or indirect relation with pay
inequality in the respective nation . Therefore, opening of these nations to foreign market seems
to have declined pay inequality.

4INTERNATIONAL TRADE
Answer 3
Stopler- Samuelson theorem describes the trade effect in relation with the income distribution of
the nation. It also explains that tariff can increase relative as well as absolute income of limited
factor used in production and less than that of profuse factor (Dabla-Norris et al. 2016).
According to this theorem, openness in economy will result in enhancing real as well as nominal
return on that factor that is abundant. Moreover, in the country with huge supply of unskilled
laborers, openness will affect in improving the real as well as nominal pay of that workers and
thus it will lead to decline in inequality of income.
According to this theorem, openness in trade must have inverse or negative correlation with pay
inequality. The correlation value has been estimated in the excel sheet for both these countries
from the year 1985 to 2005. The correlation value is found to be negative for UK economy,
which highlights that data agrees with the Stopler Sameulson theorem. Therefore, it depicts that
pay inequality in industries of UK has declined with liberalization of trade. Owing to increase in
trade, the industries demand huge skilled laborers (Breza et al. 2016). This leads to increase in
wages of workers in this industry. As a result, expansion of industries increases GDP and
consequently wage inequality decreases. On the contrary, the correlation value of Brazil is
noted as 0.18. this implies that rise in trade increases wage inequality in the industry of this
nation. As the correlation value is low than 0.5, it can be analyzed that trade openness has low
impact on pay inequality of this nation’s industries. Hence, this signifies that demand for workers
might exceed supply of workers as it has experienced decline in trade during this year.

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References
Breza, E., Kaur, S. and Shamdasani, Y., 2016. The morale effects of pay inequality (No.
w22491). National Bureau of Economic Research.
Dabla-Norris, M.E., Kochhar, M.K., Suphaphiphat, M.N., Ricka, M.F. and Tsounta, E.,
2015. Causes and consequences of income inequality: a global perspective. International
Monetary Fund.
Jaumotte, F., Lall, S. and Papageorgiou, C., 2013. Rising income inequality: technology, or trade
and financial globalization?. IMF Economic Review, 61(2), pp.271-309.
Lim, G.C. and McNelis, P.D., 2014. Income inequality, trade and financial openness.