CHAPTER 2 LABOR PRODUCTIVITY COMPARATIVE ADVANTAGE THE RICARDIAN MODEL
CHAPTER 2 LABOR PRODUCTIVITY COMPARATIVE ADVANTAGE THE RICARDIAN MODEL
Chapter Organization Introduction The Concept of Comparative Advantage aA One-Factor Economy Trade in a one-Factor World a Comparative Advantage with Many Goods a Adding transport Costs and Nontraded Goods Summary Copyright C 2003 Pearson Education, Inc Slide 1-2
Copyright © 2003 Pearson Education, Inc. Slide 1-2 Chapter Organization ▪ Introduction ▪ The Concept of Comparative Advantage ▪ A One-Factor Economy ▪ Trade in a One-Factor World ▪ Comparative Advantage with Many Goods ▪ Adding Transport Costs and Nontraded Goods ▪ Summary
Introduction 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 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 Copyright C 2003 Pearson Education, Inc Slide 1-3
Copyright © 2003 Pearson Education, Inc. Slide 1-3 ▪ 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 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. Introduction
The Concept of Comparative Advantage On valentine's day the U.S. demand for roses is about 10 million roses a Growing roses in the u.s. in the winter is difficult Heated greenhouses should be used The costs for energy, capital, and labor are substantia Resources for the production of roses could be used to produce other goods, say computers Copyright C 2003 Pearson Education, Inc Slide 1-4
Copyright © 2003 Pearson Education, Inc. Slide 1-4 ▪ On Valentine’s Day the U.S. demand for roses is about 10 million roses. ▪ Growing roses in the U.S. in the winter is difficult. • Heated greenhouses should be used. • The costs for energy, capital, and labor are substantial. ▪ Resources for the production of roses could be used to produce other goods, say computers. The Concept of Comparative Advantage
The Concept of Comparative Advantage Opportunity Cost The opportunity cost of roses in terms of computers is the number of computers that could be produced with the same resources as a given number of roses Comparative Advantage A country has a comparative advantage in producing a goods if the opportunity cost of producing that goods in terms of other goods is lower in that country than it is in other countries Copyright C 2003 Pearson Education, Inc Slide 1-5
Copyright © 2003 Pearson Education, Inc. Slide 1-5 ▪ Opportunity Cost • The opportunity cost of roses in terms of computers is the number of computers that could be produced with the same resources as a given number of roses. ▪ Comparative Advantage • A country has a comparative advantage in producing a goods if the opportunity cost of producing that goods in terms of other goods is lower in that country than it is in other countries. The Concept of Comparative Advantage
The Concept of Comparative Advantage Suppose that in the U.s. 10 million roses can be produced with the same resources as 100,000 computers a Suppose also that in South America 10 million roses can be produced with the same resources as 30,000 computers a This example assumes that South american workers are less productive than U.S. workers Copyright C 2003 Pearson Education, Inc Slide 1-6
Copyright © 2003 Pearson Education, Inc. Slide 1-6 ▪ Suppose that in the U.S. 10 million roses can be produced with the same resources as 100,000 computers. ▪ Suppose also that in South America 10 million roses can be produced with the same resources as 30,000 computers. ▪ This example assumes that South American workers are less productive than U.S. workers. The Concept of Comparative Advantage
The Concept of Comparative Advantage If each country specializes in the production of the goods with lower opportunity costs, trade can be beneficial for both countries Roses have lower opportunity costs in South America Computers have lower opportunity costs in the U.S a The benefits from trade can be seen by considering the changes in production of roses and computers in both countries Copyright C 2003 Pearson Education, Inc Slide 1-7
Copyright © 2003 Pearson Education, Inc. Slide 1-7 ▪ If each country specializes in the production of the goods with lower opportunity costs, trade can be beneficial for both countries. • Roses have lower opportunity costs in South America. • Computers have lower opportunity costs in the U.S. ▪ The benefits from trade can be seen by considering the changes in production of roses and computers in both countries. The Concept of Comparative Advantage
The Concept of Comparative Advantage ble 2-1: Hypothetical Changes in Production Million roses Thousand Computers United States 10 +100 South america +10 30 Total 0 +70 Copyright C 2003 Pearson Education, Inc Slide 1-8
Copyright © 2003 Pearson Education, Inc. Slide 1-8 Table 2-1: Hypothetical Changes in Production The Concept of Comparative Advantage
The Concept of Comparative Advantage a The example in Table 2-1 illustrates the principle of comparative advantage If each country exports the goods in which it has comparative advantage (lower opportunity costs), then all countries can in principle gain from trade What determines comparative advantage? Answering this question would help us understand how country differences determine the pattern of trade (which goods a country exports) Copyright C 2003 Pearson Education, Inc Slide 1-9
Copyright © 2003 Pearson Education, Inc. Slide 1-9 ▪ The example in Table 2-1 illustrates the principle of comparative advantage: • If each country exports the goods in which it has comparative advantage (lower opportunity costs), then all countries can in principle gain from trade. ▪ What determines comparative advantage? • Answering this question would help us understand how country differences determine the pattern of trade (which goods a country exports). The Concept of Comparative Advantage
A One-Factor Economy Assume that we are dealing with an economy(which we call Home. In this economy Labor is the only factor of production Only two goods(say wine and cheese)are produced The supply of labor is fixed in each country The productivity of labor in each goods is fixed Perfect competition prevails in all markets Copyright C 2003 Pearson Education, Inc Slide 1-10
Copyright © 2003 Pearson Education, Inc. Slide 1-10 A One-Factor Economy ▪ Assume that we are dealing with an economy (which we call Home). In this economy: • Labor is the only factor of production. • Only two goods (say wine and cheese) are produced. • The supply of labor is fixed in each country. • The productivity of labor in each goods is fixed. • Perfect competition prevails in all markets