1. Chapter 2 Labor Productivity and Comparative Advantage: The Ricardian Model 湖南大学经济与贸易学院 刘 志 忠

2. Chapter Organization Introduction A One-Factor Economy Trade in a One-Factor World Comparative Advantage with Many Goods Empirical Evidence on the Ricardian Model Summary 湖南大学经济与贸易学院 刘 志 忠

3. Countries engage in international trade for two basic reasons: They are different from each other in terms of climate, land, capital, labor, and technology. They are different from each other in terms of climate, land, capital, labor, and technology. They try to achieve scale economies in production. They try to achieve scale economies in production. The Ricardian model is based on technological differences across countries. These technological differences are reflected in differences in the productivity of labor. These technological differences are reflected in differences in the productivity of labor.Introduction 湖南大学经济与贸易学院 刘 志 忠

4. Question 1 (CH02) Suppose Home has 1000 units of labor available. Foreign has 800 units of labor available. They can produce two goods, apples and bananas. Home’ unit labor requirement in apple production is 5, while in banana production it is 2. Foreign’ unit labor requirement in apple production is 6; while in banana production it is 1. Graph Home’s and Foreign’s production possibility frontier. Construct Home’s and Foreign’s relative supply curve Construct the world relative supply curve. 湖南大学经济与贸易学院 刘 志 忠

5. Question 2 (CH02) The world relative demand takes the following form: demand for apples/demand for bananas = price of bananas/price of apples. The world relative demand takes the following form: demand for apples/demand for bananas = price of bananas/price of apples. What is the equilibrium relative price of apples? Describe the pattern of trade. Show both Home and Foreign gains form trade. Determine the relative wage of Home’s workers. 湖南大学经济与贸易学院 刘 志 忠

6.  A Numerical Example The following table describes the technology of the two counties: In world equilibrium, assume that Pc/P W = 1 gallon of wine per pound of cheese. Table 2-2: Unit Labor Requirements Trade in a One-Factor World 湖南大学经济与贸易学院 刘 志 忠

7. Relative Wages Because there are technological differences between the two countries, trade in goods does not make the wages equal across the two countries. Because there are technological differences between the two countries, trade in goods does not make the wages equal across the two countries. A country with absolute advantage in both goods will enjoy a higher wage after trade. A country with absolute advantage in both goods will enjoy a higher wage after trade. Trade in a One-Factor World 湖南大学经济与贸易学院 刘 志 忠

8. This can be illustrated with the help of a numerical example: This can be illustrated with the help of a numerical example: Assume that P C = $12 and that P W = $12. Therefore, we have P C / P W = 1 as in our previous example. Since Home specializes in cheese after trade, its wage will be (1/a LC )P C = ( 1/1)$12 = $12. Since Foreign specializes in wine after trade, its wage will be (1/a * LW ) P W = (1/3)$12 = $4. Therefore the relative wage of Home will be $12/$4 = 3. Thus, the country with the higher absolute advantage will enjoy a higher wage after trade. Trade in a One-Factor World

9. Question 3 (CH02) Table 2-1: Home and Foreign Unit Labor Requirements Suppose Home and Foreign are able to produce 5 different goods. 湖南大学经济与贸易学院 刘 志 忠

10. Setting Up the Model Both countries consume and are able to produce a large number, N, of different goods. Both countries consume and are able to produce a large number, N, of different goods. Relative Wages and Specialization The pattern of trade will depend on the ratio of Home to Foreign wages. The pattern of trade will depend on the ratio of Home to Foreign wages. Goods will always be produced where it is cheapest to make them. Goods will always be produced where it is cheapest to make them. For example, it will be cheaper to produce good i in Home if wa Li w/w *. Comparative Advantage with Many Goods

11. Table 2-4: Home and Foreign Unit Labor Requirements 湖南大学经济与贸易学院 刘 志 忠

12. Determining the Relative Wage in the Multigood Model To determine relative wages in a multigood economy we must look behind the relative demand for goods (i.e., the relative derived demand). To determine relative wages in a multigood economy we must look behind the relative demand for goods (i.e., the relative derived demand). The relative demand for Home labor depends negatively on the ratio of Home to Foreign wages. The relative demand for Home labor depends negatively on the ratio of Home to Foreign wages. Comparative Advantage with Many Goods 湖南大学经济与贸易学院 刘 志 忠

13. 3 10 Apples 8 Bananas 4 Caviar 2 Dates 0.75 Enchiladas RD Comparative Advantage with Many Goods Figure 2-5: Determination of Relative Wages RS Relative wage Rate, w/w * Relative quantity of labor, L/L *

14. Empirical Evidence on the Ricardian Model Figure 2-6: Productivity and Exports

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

16. The fact that trade benefits a country can be shown in either of two ways: We can think of trade as an indirect method of production. We can think of trade as an indirect method of production. We can show that trade enlarges a country ’ s consumption possibilities. We can show that trade enlarges a country ’ s consumption possibilities. The distribution of the gains from trade depends on the relative prices of the goods countries produce. Summary 湖南大学经济与贸易学院 刘 志 忠

17. Extending the one-factor, two-good model to a world of many commodities makes it possible to illustrate that transportation costs can give rise to the existence of nontraded goods. The basic prediction of the Ricardian model-that countries will tend to export goods in which they have relatively high productivity- has been confirmed by a number of studies. Summary 湖南大学经济与贸易学院 刘 志 忠

18. Homework In the Specific Factors Model, suppose there are 1000 workers. MPL M =250 － 0.2L M ; MPL F =350 － 0.3L F. P M =P F =1. Determine the Labor used in manufactures and the income of capital owners. Determine the Labor used in food and the income of landowners. What is the equilibrium relative price of manufactures? 湖南大学经济与贸易学院 刘 志 忠

19. Homework In the Specific Factors Model, suppose there are 1000 workers. MPL M =250 － 0.2L M ; MPL F =350 － 0.3L F. P M =2,P F =1. Determine the Labor used in manufactures and the income of capital owners. Determine the Labor used in food and the income of landowners. What is the equilibrium relative price of manufactures? 湖南大学经济与贸易学院 刘 志 忠

20. Question 3 (CH02) Table 2-1: Home and Foreign Unit Labor Requirements Suppose Home and Foreign are able to produce 5 different goods. 湖南大学经济与贸易学院 刘 志 忠