chapter 2 labor productivity and comparative advantage: the ricardian model...

Chapter 2Chapter 2

Labor Productivity and ComparatiLabor Productivity and Comparative Advantage: The Ricardian Move Advantage: The Ricardian Mo

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湖南大学经济与贸易学院刘志忠湖南大学经济与贸易学院刘志忠

Chapter OrganizationChapter Organization

IntroductionIntroductionA One-Factor EconomyA One-Factor EconomyTrade in a One-Factor World Trade in a One-Factor World Comparative Advantage with Many GoodsComparative Advantage with Many GoodsEmpirical Evidence on the Ricardian Empirical Evidence on the Ricardian ModelModelSummarySummary


Countries engage in international trade for Countries engage in international trade for two basic reasons:two basic reasons: They are different from each other in terms of They are different from each other in terms of

climate, land, capital, labor, and technology.climate, land, capital, labor, and technology. They try to achieve scale economies in They try to achieve scale economies in

production.production.

The The Ricardian modelRicardian model is based on is based on technological differences across countries.technological differences across countries. These technological differences are reflected in These technological differences are reflected in

differences in the productivity of labor.differences in the productivity of labor.

IntroductionIntroduction


Question 1 (CH02)Question 1 (CH02)Suppose Home has 1000 units of labor available.Suppose Home has 1000 units of labor available. Foreign has 800 units of labor available. They c Foreign has 800 units of labor available. They can produce two goods, apples and bananas. Hoan produce two goods, apples and bananas. Home’ unit labor requirement in apple production is me’ unit labor requirement in apple production is 5, while in banana production it is 2. Foreign’ uni5, while in banana production it is 2. Foreign’ unit labor requirement in apple production is 6; whilt labor requirement in apple production is 6; while in banana production it is 1. e in banana production it is 1. Graph Home’s and Foreign’s production possibiliGraph Home’s and Foreign’s production possibility frontier. ty frontier. Construct Home’s and Foreign’s relative supply Construct Home’s and Foreign’s relative supply curvecurveConstruct the world relative supply curve.Construct the world relative supply curve.


Question 2 (CH02)Question 2 (CH02)

The world relative demand takes the following The world relative demand takes the following form: demand for apples/demand for bananas = form: demand for apples/demand for bananas = price of bananas/price of apples.price of bananas/price of apples.What is the equilibrium relative price of apples? What is the equilibrium relative price of apples? Describe the pattern of trade.Describe the pattern of trade.Show both Home and Foreign gains form trade.Show both Home and Foreign gains form trade.Determine the relative wage of Home’s workers.Determine the relative wage of Home’s workers.


A Numerical Example• The following table describes the technology of the

two counties: In world equilibrium, assume that Pc/PW = 1 gallon of

wine per pound of cheese.

Table 2-2: Unit Labor Requirements

Trade in a One-Factor WorldTrade in a One-Factor World


Relative WagesRelative Wages Because there are technological differences Because there are technological differences

between the two countries, trade in goods between the two countries, trade in goods does not make the wages equal across the does not make the wages equal across the two countries.two countries.

A country with absolute advantage in both A country with absolute advantage in both goods will enjoy a higher wage after trade.goods will enjoy a higher wage after trade.



This can be illustrated with the help of a numerical This can be illustrated with the help of a numerical example:example:

Assume that Assume that PPCC = $12 and that = $12 and that PPWW = $12. Therefore, we = $12. Therefore, we have have PPCC / / PPWW = 1 as in our previous example.= 1 as in our previous example.

Since Home specializes in cheese after trade, its wage will Since Home specializes in cheese after trade, its wage will be (1/be (1/aaLCLC))PPCC = ( 1/1)$12 = $12. = ( 1/1)$12 = $12.

Since Foreign specializes in wine after trade, its wage will Since Foreign specializes in wine after trade, its wage will be (1/be (1/aa**

LWLW) ) PPWW = (1/3)$12 = $4. = (1/3)$12 = $4.

Therefore the relative wage of Home will be $12/$4 = 3.Therefore the relative wage of Home will be $12/$4 = 3.Thus, the country with the higher absolute advantage will Thus, the country with the higher absolute advantage will enjoy a higher wage after trade.enjoy a higher wage after trade.


Question 3 (CH02)Question 3 (CH02)Table 2-1: Home and Foreign Unit Labor Requirements

Suppose Home and Foreign are able to produce 5 different goods .


Setting Up the ModelSetting Up the Model Both countries consume and are able to produce Both countries consume and are able to produce

a large number, N, of different goods.a large number, N, of different goods.

Relative Wages and SpecializationRelative Wages and Specialization The pattern of trade will depend on the ratio of The pattern of trade will depend on the ratio of

Home to Foreign wages.Home to Foreign wages. Goods will always be produced where it is Goods will always be produced where it is

cheapest to make them.cheapest to make them.For example, it will be cheaper to produce good i in For example, it will be cheaper to produce good i in Home if Home if wawaLiLi < < ww**aa**

LiLi , or by rearranging if , or by rearranging if aa**LiLi//aaLiLi > > ww//ww**..

Comparative Advantage Comparative Advantage with Many Goodswith Many Goods


Table 2-4: Home and Foreign Unit Labor Requirements


Determining the Relative Wage in the Determining the Relative Wage in the Multigood ModelMultigood Model To determine relative wages in a multigood To determine relative wages in a multigood

economy we must look behind the relative economy we must look behind the relative demand for goods (i.e., the demand for goods (i.e., the relative derived relative derived demanddemand).).

The relative demand for Home labor depends The relative demand for Home labor depends negatively on the ratio of Home to Foreign negatively on the ratio of Home to Foreign wages.wages.



3

10Apples

8 Bananas

4 Caviar

2Dates

0.75Enchiladas

RD

Comparative Advantage Comparative Advantage with Many Goodswith Many GoodsFigure 2-5: Determination of Relative Wages

RSRelative wageRate, w/w*

Relative quantityof labor, L/L*

Empirical EvidenceEmpirical Evidence on the Ricardian Model on the Ricardian Model

Figure 2-6: Productivity and Exports

SummarySummaryWe examined the Ricardian model, the We examined the Ricardian model, the simplest model that shows how differences simplest model that shows how differences between countries give rise to trade and gains between countries give rise to trade and gains from trade.from trade.In this model, labor is the only factor of In this model, labor is the only factor of production and countries differ only in the production and countries differ only in the productivity of labor in different industries.productivity of labor in different industries.In the Ricardian model, a country will export In the Ricardian model, a country will export that commodity in which it has comparative that commodity in which it has comparative (as opposed to absolute) labor productivity (as opposed to absolute) labor productivity advantage.advantage.

The fact that trade benefits a country can The fact that trade benefits a country can be shown in either of two ways:be shown in either of two ways: We can think of trade as an indirect method of We can think of trade as an indirect method of

production.production. We can show that trade enlarges a country’s We can show that trade enlarges a country’s

consumption possibilities.consumption possibilities.

The distribution of the gains from trade The distribution of the gains from trade depends on the relative prices of the depends on the relative prices of the goods countries produce.goods countries produce.

SummarySummary


Extending the one-factor, two-good model to Extending the one-factor, two-good model to a world of many commodities makes it a world of many commodities makes it possible to illustrate that transportation costs possible to illustrate that transportation costs can give rise to the existence of nontraded can give rise to the existence of nontraded goods.goods.The basic prediction of the Ricardian model-The basic prediction of the Ricardian model-that countries will tend to export goods in that countries will tend to export goods in which they have relatively high productivity- which they have relatively high productivity- has been confirmed by a number of studies.has been confirmed by a number of studies.

SummarySummary


HomeworkHomeworkIn the Specific Factors Model, suppose there In the Specific Factors Model, suppose there are 1000 workers. are 1000 workers. MPLMPLMM=250=250－－ 0.2L0.2LMM;; MPLMPLFF=350=350－－ 0.3L0.3LFF.. PPMM=P=PFF=1.=1.

Determine the Labor used in manufactures aDetermine the Labor used in manufactures and the income of capital owners.nd the income of capital owners.Determine the Labor used in food and the incDetermine the Labor used in food and the income of landowners.ome of landowners.What is the equilibrium relative price of manuWhat is the equilibrium relative price of manufactures?factures?


HomeworkHomework In the Specific Factors Model, suppose there are 10In the Specific Factors Model, suppose there are 1000 workers. 00 workers. MPLMPLMM=250=250－－ 0.2L0.2LMM;; MPLMPLFF=350=350－－ 0.3L0.3LFF.. PPMM=2,P=2,PFF=1.=1.Determine the Labor used in manufactures and the iDetermine the Labor used in manufactures and the income of capital owners.ncome of capital owners.Determine the Labor used in food and the income of Determine the Labor used in food and the income of landowners.landowners.What is the equilibrium relative price of manufactureWhat is the equilibrium relative price of manufactures?s?


Question 3 (CH02)Question 3 (CH02)Table 2-1: Home and Foreign Unit Labor Requirements

Suppose Home and Foreign are able to produce 5 different goods .


chapter 2 labor productivity and comparative advantage: the ricardian model...

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