class2

Question 1

Competitive vs comparative advantage

Answer 1

Competitive: Provides better value than its competitors
Comparative: Produce a good for a lower opportunity cost than other. When the OC of producing that good is lower than in other countries. Comes from international differences in the productivity of labor

Question 2

Opportunity cost and no trade

Answer 2

The loss of potential gain from other alternatives when one alternative is chosen

Question 3

Ricardian Model: Assumptions

Answer 3

1. Labor is the only factor of production and moves freely from one industry to another
2. Labor productivity varies across countries due to differences in technology. Is constant in each country
3. The supply of labor L in each country is constant
4. 2 goods
5. Competitions allows workers to be paid a wage equal to the value of what they produce and allows them to work in the industry that pays the highest wage.
6. 2 countries

Question 4

Unit labor requirement

Answer 4

constant number of hours of labor required to produce one unit of output. A low unit labor requirement means high labor productivity.

Question 5

Production Possibility Frontier

Answer 5

shows the maximum different mixes of goods that can be produced for a fixed quantity of ressources.
aLC QC + aLW QW ≤ L
one factor of production, so is a straight line
OC is constant = absolute value of PPF slope = aLC / aLW

Question 6

How to know what will be produced?

Answer 6

Need to know what are the wages. Workers will choose to work in the industry that pays the higher wage

Hourly wage = Price(value produced in an hour)/unit labor requirement (aL)

Question 7

How to know what the economy will specialize in ?

Answer 7

In the production of the good which the relative price exceeds its opportunity cost

Pc/Pw > aLc/aLw ; will specialize in c
Pc/Pw < aLc/aLw ; will specialize in w
if = ; no trade. both goods will be produced

Question 8

Relative wages

Answer 8

Home wages relative to foreign wages.
Productivity (technological) differences determine relative wage differences across countries
= Wage home / Wage foreign

Lies between the ratio of the 2 countries productivities in the 2 industries. That gives a cost advantage to each country.

Relative labor productivity seems to be a good predictor of relative wages

Question 9

Costs of production

Answer 9

W * aL

Higher wage rate can be offset by a higher productivity and low wages can offset low productivity

Question 10

Gains from trade

Answer 10

1. Expanding consumption possibilities:
   - can expand beyond the production possibility frontier
   - enlarges the range of choice making all residents better off
2. Trade as an indirect method of production
   - can “produce” a good more efficiently by making it and trading it

Question 11

Misconceptions about comparative advantage

Answer 11

1. “Free trade is beneficial for a country only is it’s more productive than foreign goods”: FALSE
   - High costs derived from inefficient use of resources
   -benefits of free trade don’t depend on absolute advantage, but on comparative advantage. Export the goods in which they have relatively high productivity
2. “Free trade with countries that pay low wages hurts high-wage countries. Foreign competition is unfair.”
   - Producers/workers benefit by earning a higher income in the industries that use resources more efficiently
   - Wage rates depend on countries different relative labor productivities across industries
   - Isolation and autarky leads to welfare loss
3. “Free trade exploits less productive countries whose workers make low wages”
   - Consumers benefit from free trade by having access to efficiently produced goods
   - Producers/workers benefit from having higher profit/wage compared to the alternative

Question 12

Which country will produce which goods? when more than 2 goods

Answer 12

Depends only on the ratio of Home to foreign wages
Will always be produced where its cheapest to make them

aLi / aLi > w/w → will be produced in Home
aLi / aLi < w/w → will be produced in Foreign