3 - MULTIGOOD RICARDIAN MODEL Flashcards
WHAT IS THE UNIT LABOR REQUIREMENT (aLx)?
The unit labor requirement (aLx) is the amount of labor needed to produce one unit of a good.
For example, aL7 represents Home’s labor required for producing cheese.
HOW IS SPECIALIZATION DETERMINED IN THE MULTIGOOD RICARDIAN MODEL?
Specialization is based on the wage ratio and relative labor requirements. Goods are produced where the cost is lower. If Home’s wage is lower relative to the labor requirement of a good, Home produces it, otherwise, Foreign does.
WHAT ARE NONTRADED GOODS?
Nontraded goods are those not worth trading due to high transportation costs or lack of comparative advantage. These goods are usually produced and consumed domestically.
WHAT FACTORS CAN TURN TRADED GOODS INTO NONTRADED GOODS?
Transportation costs can make some goods nontraded.
For example, if transport cost is high enough (e.g., 100%), goods like dates and caviar may be produced domestically rather than imported.
HOW DO RELATIVE WAGES AFFECT TRADE PATTERNS?
Relative wages influence whether Home or Foreign produces a good. If the wage ratio between Home and Foreign changes, it can lead to a shift in specialization and production between the two countries.
WHAT IS THE RELATIVE DEMAND AND SUPPLY OF LABOR IN THE MULTIGOOD MODEL?
Relative demand for labor is derived from the demand for goods, and relative supply is based on each country’s fixed labor. The intersection of relative demand and supply determines equilibrium wages and trade patterns.
HOW DO COUNTRIES GAIN FROM TRADE IN THE MULTIGOOD RICARDIAN MODEL?
Countries gain from trade by importing goods that are cheaper to produce abroad. This indirect production saves labor and resources, allowing both countries to consume beyond their production possibilities.
WHAT IS THE DIFFERENCE BETWEEN COMPARATIVE ADVANTAGE AND COMPETITIVE ADVANTAGE?
Comparative advantage is about producing a good at a lower opportunity cost, while competitive advantage can also involve lower production costs due to lower wages, even if a country is less productive overall.
