Ricardian model Lecture 2 Flashcards
What is comparative advantage?
if the opportunity cost of producing a good in terms of other goods is lower in a country
than it is in other countries. e.g two countries can benefit if they each export goods in which they have a comparative advantage over the other
what are the assumptions of the classical Ricardian model?
- Labor is the only factor of production.
- Labor productivity varies across countries due to differences in technology, but labour productivity in each country is constant.
- The supply of labor in each country is constant.
complete specialisation
how does a country gain from trade?
Gains from trade come from specializing in the type of production which uses resources most efficiently, and using the income generated from that
production to buy the goods and services that countries desire
e.g producing where a country has a comparative advantage
is trade beneficial to relativley unproductive countries
yes.
It is comparative advantage that matters not absolute advantage, lack of absolute advantage results in lower wages which is seen as more competitive
The competitive advantage of an industry depends not only on its productivity relative to the foreign industry,
but also on the domestic wage rate relative to the foreign wage rate.
does Free trade with countries that pay low wages hurts high wage countries
no.
ho,e only cares in terms of its own production. if its cheaper to produce in foreign despite that being high productivity or low wage isn’t their concern
does free trade exploit less productive countries?
Countries will be better off with trade than without out. often an emotional question but what is the alternative? condemning trade would result in deeper poverty
why might countries not completley specialise in trade?
there will be more than one factor in trade despite what the model suggests
Transportation costs
does absolute advantage determine trade
no it is only comparitive advanntage. a country can be worse in all industries yet be comparatively better of something e.g
Bangladesh average 28% of Chinese productivity but 77% in apparel and makes up large exports of apparel to china
hat are the limitations of the ricardian model?
predicts extreme specialization which does not happen
says nothing on winners and losers from trade
does not explain large intra-industry trade
w
what is comparitive advantage
A country has a comparative advantage in producing a good when the opportunity cost of producing that good is
lower than other countries.
what happens to prices with trade
they settle in between the pre trade price levels of each country
what does the Ricardian model say about the distribution of income?
nish.
workers all work in the industry with the higher wage this is not the case in the real world
how is RS determined?
the comparatively more efficient firm in one good has a certain opportunity costs lets say 1/2 (1 good 1 for every 2 good 2)
for any price below 1/2 nothing will be produced
when p1/p2= 1/2 then both countries will specialise in their comparative advantage and relative supply is a vertical line until the opportunity cost of country is reached and then another flat line
inverse demand = the maximum production mix inversed.
what is the demand function in specific model? (how determined)
p1 x mpl1
