Chapter 3 Ricardian model
1 Chapter 3 Ricardian Model
Ricardian model Opportunity costs and comparative advantage An Example Relative demand-relative supply analysis a one factor ricardian model Production possibilities Gains from trade · Wages and trade Misconceptions about comparative advantage Transportation costs and non-traded goods Empirical evidence
2 Ricardian Model • Opportunity costs and comparative advantage • An Example • Relative demand-relative supply analysis • A one factor Ricardian model • Production possibilities • Gains from trade • Wages and trade • Misconceptions about comparative advantage • Transportation costs and non-traded goods • Empirical evidence
Introduction Theories of why trade occurs can be grouped into three categories Market size and distance between markets determine how much countries buy and sell. These transactions benefit both buyers and sellers Differences in labor, physical capital, natural resources and technology create productive advantages for countries Economies of scale(larger is more efficient) create productive advantages for countries
3 Introduction • Theories of why trade occurs can be grouped into three categories: • Market size and distance between markets determine how much countries buy and sell. These transactions benefit both buyers and sellers. • Differences in labor, physical capital, natural resources and technology create productive advantages for countries. • Economies of scale (larger is more efficient) create productive advantages for countries
Introduction(cont The Ricardian model ( chapter 3 says differences in productivity of labor between countries cause productive differences, leading to gains from trade Differences in productivity are usually explained by differences in technology The Heckscher-Ohlin model(chapter 4)says differences in labor, labor skills, physical capital and land between countries cause productive diferences, leading to gains from trade
4 Introduction (cont.) • The Ricardian model (chapter 3) says differences in productivity of labor between countries cause productive differences, leading to gains from trade. – Differences in productivity are usually explained by differences in technology. • The Heckscher-Ohlin model (chapter 4) says differences in labor, labor skills, physical capital and land between countries cause productive differences, leading to gains from trade
Comparative Advantage and Opportunity Cost The ricardian model uses the concepts of opportunity cost and comparative advantage The opportunity cost of producing something measures the cost of not being able to produce something else
5 Comparative Advantage and Opportunity Cost • The Ricardian model uses the concepts of opportunity cost and comparative advantage. • The opportunity cost of producing something measures the cost of not being able to produce something else
Comparative advantage and Opportunity Cost(cont A country faces opportunity costs when it employs resources to produce goods and services For example, a limited number of workers could be employed to produce either wine or cheese The opportunity cost of producing wine is the amount of cheese not produced The opportunity cost of producing cheese is the amount of wine not produced a country faces a trade off: how much wine or cheese should it produce with the limited resources that it has?
6 Comparative Advantage and Opportunity Cost (cont.) • A country faces opportunity costs when it employs resources to produce goods and services. • For example, a limited number of workers could be employed to produce either wine or cheese. – The opportunity cost of producing wine is the amount of cheese not produced. – The opportunity cost of producing cheese is the amount of wine not produced. – A country faces a trade off: how much wine or cheese should it produce with the limited resources that it has?
Comparative Advantage and Opportunity Cost (cont A country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than it is in other countries A country with a comparative advantage in producing a good uses its resources most eficiently when it produces that good compared producing other goods
7 Comparative Advantage and Opportunity Cost (cont.) • A country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than it is in other countries. • A country with a comparative advantage in producing a good uses its resources most efficiently when it produces that good compared to producing other goods
Production possibilities frontier Unattainable Attainable 它日 …………… 0 5 wine(millions of bottles per ngonth)
8 Production Possibilities Frontier Attainable Unattainable wine (millions of bottles per month) 0 1 2 3 4 5 5 10 15 a b c d e f z
An Example China can produce 4, 000 wine/hour or Can produce 1, 333 cheese/hour Opportunity cost o c. of 1 cheese is 3 wine of 0 C. 1 unit of wine is 0.333 cheese One one wine cheese China 1/3 3 wine · Montenegro cheese can produce 1, 333 wine/hour or can produce 4,000 cheese/hour Montenegro 3 1/3 wine o c of 1 cheese is 0.333 wine cheese oC of 1 unit of wine is 3 cheese
9 An Example • China – can produce 4,000 wine/hour or – Can produce 1,333 cheese/hour – o.c. of 1 cheese is 3 wine – o.c. 1 unit of wine is 0.333 cheese • Montenegro – can produce 1,333 wine/hour or – can produce 4,000 cheese/hour – o.c. of 1 cheese is 0.333 wine – oc. of 1 unit of wine is 3 cheese Opportunity cost of One wine one cheese China 1/3 cheese 3 wine Montenegro 3 cheese 1/3 wine
An EXample(cont) 一三 3 Montenegros PPF China's PPF wine(thousands per hour) 10
10 An Example (cont) 1 2 3 4 wine (thousands per hour) 1 2 3 5 4 cheese (thousands per hour) Montenegro’s PPF 1 China’s PPF
