Flashcards in Ricardian Deck (47)
How are countries different in Ricardian?
Different labour productivity
What is the opportunity cost of good A in terms of good B?
The number of units of good B that have to be given up to produce an additional unit of Good A.
A country has a comparative advantage in good A if...
It has a LOWER opportunity cost if good A in terms of good B compared to another country.
How can we show that trade based on comparative advantage is beendifical?
Global production rises - can produce more goods with the same resources as each country specialising means these goods are produced more efficiently.
Background on David Ricardo and why he came up with the model.
1851 Corn laws - Ricardo wanted to show that tariffs on grain imports into UK were bad
Hence he made uk look, as weak as possible and still showed Trade is beneficial.
What determines comparative advantage in Ricardian model?
Different labour productivity across countries
Dimensions of Ricardian model
2 countries, 2 goods, 1 FOP = labour
Labour mobility assumptions (2)
1. Labour mobile across industries
2. Labour immobile across countries
Assumption about market structures
Perfect competition since Ricardian is a neoclassical model
Unit labour requirement shows...
How many units of labour are needed to produce 1 unit f output?
What do unit labour requirmenrs imply about return to scale?
CRS - if we want to double output, must double inputs
How do unit labour requirements relate to labour productivity?
INVERSE of productivity - lower labour unit requirements = higher productivity
The maximum amount f a good that can be produced for any amount f ten other good.
aLW Qw + aLC Qc = L
Slope of PPF equals
Opportunity cost of cloth in terms of wine
= aLC / aLW
Optimum production depends on (2)....
1. PPF - what an economy is able to produce
2. Relative prices
Relative price of cloth in terms of wine =
- the amount of wine that can be exchanged I; the market for one unit of cloth
Relationship between wages across industries and why
Ww = Wc = W
Due to labour mobility across industries —> arbitrage
What is MC formula?
MC = labour unit requirement x wage
- the wage cost to produce an extra unit of output
2 conditions that need to be satisfied under perfect competition for an economy to produce both goods.
1. Pc = aLC x Wc
2. Pw = aLW x Ww
Optimality condition in Autarky
Pc/Pw = aLC/aLW
Relative price of cloth = opportunity cost of cloth
If PC/PW > aLC/aLW an economy t will...
Produce cloth only
If PC/PW < aLC/aLW an economy will...
Produce wine only
Define absolute advantage
Absolute adv = an economy has a lower labour unit requirement in that good compared to another country's labour unit requirement in the same good.
I,e, more efficient at producing that good.
Is trade beneficial is one country has an absolute adv in both goodS.
YES - Trade us based on comparative advnateb
What do we compare between home and foreign to determine comp adv?
aLC/aLW vs aLC*/aLW*
What happens to relaorbr priced after trade?
We have ONE WORLD RELATIVE PRICE in between the 2 pre trade domestic prices. Hence relative priced equalise across countries.
What do the shapes of world RD and RS look like?
RD = we assume standard downwards sloping demand
RS = a step function
Production is world relative price < both opportunity costs
NO cloth produced - wine only.