1. Comparative advantage (technology differences); 1
 Charles van Marrewijk
Comparative advantage (technology differences); 1
International trade based on differences in technology
assumptions
2 countries; A and B
2 goods; X and Y
1 factor of production; labor L
Constant returns to scale; CRS
Labor mobility between sectors, not between countries
Perfect competition
No transport costs
unit labor requirement
= units of labor required to produce one
unit of a final good
By assumption this is independent of the
number of laborers active in a sector (CRS), but may differ between the two countries.
Let ax be the for good X in country A, etc
unit labor requirement

2. Comparative advantage (technology differences); 2
 Charles van Marrewijk
Comparative advantage (technology differences); 2
We can make a table to summarize the state of technology
good X
good Y
country A
country B ay ax bx by
= 6
= 4
= 2
= 3
To be concrete we put some actual numbers in the table
Note that country B is more efficient than country A; it uses less labor to produce 1 unit of good X and it uses less labor to produce 1 unit of good Y. Why on earth would it trade with country A?

3. Comparative advantage (technology differences); 3
 Charles van Marrewijk
Comparative advantage (technology differences); 3
Recall the productivity table
good X
good Y
country A
country B ay ax bx by
= 6
= 4
= 2
= 3
First we derive the production possibility frontiers
Assume that country A has 600 laborers and country B has 300
Country A can produce 600/6 = 100 of X; or 600/4 = 150 of Y
Country B can produce 300/2 = 150 of X; or 300/3 = 100 of Y

4. Comparative advantage (technology differences); 4
 Charles van Marrewijk
Comparative advantage (technology differences); 4
Country A can thus produce at most 100 X or 150 Y X Y
If 12 Labor is moved from Y to X country A produces 3 less Y and 2 more X; independent of the initial point
150
100
Country A’s ppf is thus a straight line (because of CRS and 1 factor of production) A
Similarly for country B
100
150 B
Suppose that consumers in country A and in country B always want to consume at least some of both goods

5. Comparative advantage (technology differences); 5
 Charles van Marrewijk
Comparative advantage (technology differences); 5
In autarky (without trade) country A might produce and consume
At point A, country B at point B Y
Note that if country A wanted to change its consumption point it would have to move along its own ppf. A B
If A wants to consume more X it has to give up 6/4 = 1.5 units of Y
A’s opportunity cost of X is 1.5 Y X
If B wants to consume more X it has to give up 2/3 = 0.66 of Y
B’s opportunity cost of X is only 0.66 Y

6. Comparative advantage (technology differences); 6
 Charles van Marrewijk
Comparative advantage (technology differences); 6
The opportunity cost differences are evident from the table
good X
good Y
country A
country B ay ax bx by
= 6
= 4
= 2
= 3
ax/ay = 1.5
bx/by = .66
If A wants to consume 1 more X it needs ax labor. These have to come from sector Y, where ax labor could have produced ax/ay of Y
Similarly, for B the opportunity cost of X is bx/by of Y
Good X is relatively expensive in country A if its opportunity cost in terms of Y are larger than in B, i.e. if ax/ay > bx/by
For country B this implies that the opportunity cost of X is low relative to country A:
Country B has a comparative advantage in X
For country A the opportunity cost of Y in terms of X is low relative to country B:
Country A has a comparative advantage in Y

7. Comparative advantage (technology differences); 7
 Charles van Marrewijk
Comparative advantage (technology differences); 7
The differences in opportunity costs give rise to gains from trade
If A specializes in the production of X and B in the production of Y
They may trade with each other, say at px/py = 0.90 Y
Say A wants to buy 40 X
It has to pay 36 Y
Apr
And might produce at Apr and consume at Ac
Provided B is willing to demand 36 Y Ac A
In exchange for 40 X
That is the
have to coincide
trade triangles Bc
Both countries gain: they consume more after trade B X
Bpr