Lecture 2 : Ricardian Model Flashcards
comparative advantage
A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country; alternatively, when the relative productivities between goods compared with another country are the highest.
Terms of Trade
The amount of one good traded per unit of another in a mutually voluntary exchange. Often expressed as a ratio of prices and measured as a ratio of units; for example, pounds of cheese per gallon of wine.
Autarky
No trade
Ricardian Model Assumptions
- 2 countries
- 2 goods
- homogeneous goods
- No transport costs
- labor is perfectly mobile
- full employment
Ricardian Model Assumptions Continued
- Technological differences across countries
- perfectly competitive markets
- one input of production
- Fixed production costs of good
- results in complete specialization
General Equilibrium
Complete model of entire economy, all markets (labor and goods) interact and are in equilibrium.
Production of Goods
The production of each good is equal to the total labor hours used in production divided by unit labor requirement for that good .
Unit labor requirements
The quantity of labor needed to produce one unit of a good.
Exogenous variables
A variable whose value is determined external to the model and whose value is known to the agents in the model. In the Ricardian model, the unit labor requirements and the labor endowment are exogenous.
Endogenous Variables
A variable whose value is determined as an outcome of, or solution to, the model. In the Ricardian model, the allocation of workers to production, the quantities of the goods produced, and the terms of trade are endogenous.
Production Possibilities Frontier (PPF)
The set of all output combinations that could be produced in a country when all the labor inputs are fully employed. In the Ricardian model, the PPF is linear.
Labor productivity
The quantity of a good that can be produced per unit of labor input. It is the reciprocal of the unit labor requirement.
Absolute Advantage
A country has an absolute advantage in the production of a good if it can produce the good at a lower labor cost and if labor productivity in the good is higher than in another country.
Opportunity cost
The value or quantity of something that must be given up to obtain something else. In the Ricardian model, opportunity cost is the amount of a good that must be given up to produce one more unit of another good.
Comparative Advantage
A country has a comparative advantage in the production of a good if it can produce that good at a lower opportunity cost relative to another country.
