2.1 Flashcards
what is a GVC (global value chain)
the value added of all activities that contribute directly or indirectly to a final good or service (and the activities’ global distribution)
what factors influence trade
cultural affinity (language for ex),
geography (access to sea, no mountain barriers),
political factors,
technological improvements (in transportation and transmission of information)
critique of ricardo’s trade theory
only labour as factor of production not capital or land
what is the conclusion of ricardo’s trade theory
concluded it would still be advantageous to both countries to engage in trade even though one country had an absolute advantage in the production of both goods
what is the setting of ricardo’s trade theory
2 countries
labour only factor of production completely immobile internationally, completely mobile btw. sectors,
wages determined in national labour market,
technology fixed and differs btw. countries,
no transport costs,
perfect competition
what does ac or af mean in ricardo’s trade theory
labour hours needed per unit of cloth (food)
what does production of both products under autarky require in ricardo’s trade theory
Wc=Wf=W,
if Wc>Wf only cloth would be produced,
if Wc
given constant returns to scale what is the amount of cloth produced under autarky in ricardo’s trade theory
Qc = (1/ac)Lc,
Qc: total units of cloth
ac: labour hours needed per unit of production of cloth
Lc: labour involved in production of cloth
what is the marginal product of labour in terms of cloth under autarky in ricardo’s trade theory
Qc = (1/ac)Lc,
so MPLc = APLc = 1/ac,
Qc: total units of cloth
ac: labour hours needed per unit of production of cloth
Lc: labour involved in production of cloth
what does the perfect competition assumption mean for the price under autarky in ricardo’s trade theory
wc=pcMPLc -> wc=pc/ac, pc=acwc, ac: labour hours needed per unit of production of cloth wc: wages earned in cloth sector pc: price of one unit of cloth
since under autarky both goods must be produced, wc=wf=w what determines the price of each good
pc/ac=pf/af,
p = pc/pf = ac/af,
ac: labour (hours) needed per unit of production of cloth,
pc: price of one unit of cloth,
relative price of cloth is determined by technology
what does autarky production of both goods leading to p = pc/pf = ac/af imply
the greater the difference in terms of the labour input required, the greater the price difference between pc and pf,
ratio ac/af nothing but the opportunity cost of C unit in terms of F
what is the full employment equation under autarky producing both goods
L=Lc+Lf,
L=acQc+afQf,
ac: labour (hours) needed one unit cloth,
Wc: total units of cloth produced
what does the PPF look like under autarky producing both goods
straight line with gradient the relative ac/af,
opportunity cost of producing C in terms of F
for two country ricardian model, what equation satisfies home to have a comparative advantage even if foreign has absolute advantage on both,
ac=1/2ac, af=1/3af
ac/af>3/2ac/af home has a comparative advantage in c-making over foreign,
ac/af>ac/af home has comparative advantage in C-making
what is it that determines comparative advantage
it is the ratios that determine not the absolute values
ricardo’s great insight
both countries should specialise in the production of the good in which they have a comparative advantage
if countries are to completely specialise in production of one good then what will the relative price of cloth after trade (pt) be
between the relative prices under autarky,
p>pt>p,
these are relative prices:
home: p=pc/pf=ac/af,
when ac/af>ac/af then p>p, if home has comparative adv. in c-making its relative price of c under autarky will be lower than foreign’s
what happens to wages after the countries start trading
prices will still reflect mg costs,
pt=ptc/ptf=acwtc/afwtf and pt>p=ac/af,
then wtc>wtf
after trade, home only make c bec. wages in this sector now greater than in f sector
what is the world relative supply of cloth
qs=Qc+Qc/Qf+Qf
what would happen if pt
no country would produce C, so qs=0
what would happen if ac/af
there will be complete specialisation and
qs=(L/ac)/(L/af),
home move production towards cloth and now commands a higher price
what are the gains from trade due to specialisation
both countries gain bec. trade expands consumption possibility set beyond own PPF,
bec. world production now greater than before,
greater the change in relative prices, the greater the gains from trade
what determines prices for trade
p=MC=acw and pf=afw,
two reasons why prices may be high,
high wages and low productivity
what is the implication for wages and prices given fixed productivity levels ac (af)
p=mc=acw (afw),
since productivity fixed (by assumption), nominal prices and nominal wages always move in the same direction
what is the equation for a workers’ productivity
q=1/acL,
q/L=1/ac,
so if one worker in one time period their productivity is 1/ac
average productivity of labour equation APL
APL=1/a
if APLc=1 and APLc*=10 what does the wage need to be in order for home to be competitive in C-making
wt
does trade exploit workers of poor countries
national wages are determined in a national market and will reflect average national productivity
is foreign competition unfair and hurts the home country when it is based on low wages
no, existence of gains from trade do not depend on absolute wages, workers can earn a lot more from factories than farming for example
what is A(z) in international trade
Home’s relative productivity in good z with 1 factor and CRS,
A(z)=(1/a(z))/(1/a(z))=APLz/APLz
what is ω
ω is home’s relative wage,
ωt=wt/w*t
why is the RS upward sloping in home’s relative wage and what is its equation
x goods
y relative wages of home/foreign,
upward sloping because the more goods a country produces the higher the income,
ωt=(1/((1/z)-1)L/L
technology being the same what does higher wages mean
less competitive you will be so less products produced internationally
what is A(z)
ratio of home’s average productivity of labour compared to foreign,
A(z)=(1/a(z))/(1/a(z))=APLz/APLz
why would an increase in productivity lead to more demand for products form that country
productivity can be matched by increase in wages but as long as the increase in wages is less than the productivity increase then the good will be relatively cheaper
where do high wages come from
productivity differences determine relative wage differences across countries
what can low productivity can be offset by?
low wages
what does Krugman (1997) say
transfer of technology and capital from high wage to low wage countries and the resulting growth of labour intensive third world exports
