Chapter 3 - ricardian model Flashcards
Comparative advantage
country can produce a good or service at a lower opportunity cost than another producer.
calculate for home: aLC/aLW - relative to foreign
opportunity cost of wine and cheese. in words
amount of wine that could have been produced using the same recourses used to produce of more unit of cheese
Absolute advantage
LOWEST unit labor requirements
aLC < a*LC
what does unit labor requirement mean, a(LX) and a(LY)?
Labor productivity in each country - the number of hours of labor required to produce 1 unit of the good X.
labor requirements is the inverse of productivity
What is PPF?
Production possibility frontier: the maximum amount of wine that can be produced once the decision has been
made to produce any given amount of cheese, and vice versa.
Whare are the limits to the PPF?
Labor - Because the economy’s total labor supply is L, the limits on production are defined by the inequality:
a(LC)Q(C) + a(LW)Q(W) ≤ L.
If Q(c) is the production of cheese in a country and Q(w) is the production of wine, what is the labor used in this production?
a(LC)Q(C) and a(LW)Q(C)
How to find maximum amount of cheese the economy can produce?
Total labor / labour requirement
L/a(LC)
- intersection with x-axis.
What is the PPF equivalent to and what does a constant PFF mean?
PPF is the opportunity cost
If constant = The opportunity cost of one good in terms of the other is CONSTANT
If labour requirements for wine = 2 hours
and for cheese = 1 hour
wine sells 7$ a gallon and cheese 4$ pound.
what good will the economy specialize in?
! Cheese = 4$ an hour - more attractive for workers
(wine 3.5$ an hour)
When will economy specialize in production of cheese?
The economy will specialize in the production of cheese if the relative price of cheese exceeds its opportunity cost in terms of wine
PC/PW > aLC/aLW.
When will economy produce both goods?
the relative prices of goods are equal to their relative unit labor requirements
Pc/Pw = aLC/aLW
how much cheese will Foreign produce if it specializes in it?
L/aLC
IF OC(c,w) = 2, what does that mean?
The opportunity cost of producing cheese in terms of wine is 2, meaning the labour used to produce 1 pound of cheese, could have been used to produce 2 gallons of wine.
When will goods be produced at home?
If aLi / aLi < W/W
