Technology and Comparative Advantage Flashcards
What is the Ricardian Model
Used to analyse international trade and comparative advantage. It is based on the idea that countries specialize in producing goods in which they have a relative productivity advantage and trade those goods with other countries to benefit both parties. The model assumes that there are differences in labour productivity between countries but doesn’t consider factors such as transportation costs, taxes, or non-economic considerations. The Ricardian model illustrates how trade can be mutually beneficial even if one country is more efficient in producing all goods.
France and Germany produce beer (B) and wine (W) using labor as the only factor. France is
endowed with 1500 units of labor; Germany is endowed with 2000 units of labor. In France,
five units of labor are required to produce one unit of good B, while three units of labor are
necessary to produce one unit of good W. In Germany, two units of labor are required to produce one unit of good B, while six units of labor are necessary to produce one unit of good W.
Labor is immobile between France and Germany, but labor is mobile within a country.
questions to follow
Derive France’s production possibility frontier and illustrate it graphically
L* = 1500 , aB = 5 , aW = 3
L* = xB . aB + xW . aW
= xB . 1500/5 + xW . 1500/3
xB = 1500/5 - 1500/3 . xW
=> max beer France produces = 300 with no production of wine woth max labour of 1500
=> max wine is 500 with no beer with max labour of 1500
(B=beer , W=Wine)
a = production coefficient (Labour/B)
xB = no. of Beer
xW = no. of Wine
What is the production possibility frontier equation?
L=xB . aB + xW . a*W
(B=beer , W=Wine)
a = production coefficient (Labour/B)
xB = no. of Beer
xW = no. of Wine
What are the opportunity costs of wine instead of beer?
(How much beer do we need to give up in order to produce another unit of wine?)
one unit of beer = 5 labour units
one unit of wine = 3 labour units
=> 3/5 = 0.6
For production of one unit of wine we have to give up 0.6 bottles of beer
What is the relative price of both goods under autarky?
- autarky means perfect labour mobility between 2 sectors
- this implies identical wages
-Perfect competition = no one would make any profits
-Prices of goods = production costs
- wages x how often wages are paid
- 5 times wages of beer to produce 1 beer
PW* / PB* = aw . w / ab . w = aw / ab
= 3 / 5
- relative price = opportunity costs
Derive Germany’s production possibility frontier and graph it
L = 2000 , aB = 2 , aW = 6
xB = 2000 / 2 - 2000 / 6 . xW
xB = 1000 - 3xW
-1000 units of beer using max labour
-333,33 units of wine using max labour
-graph is xB on Y axis with 1000 point and xW on x axis with 333,33 point
-all points below line can not be produced as it would be reducing consumption (not maximising utility)
What is the opportunity cost of wine in terms of beer?
3
-wine / beer
-6 / 2 = 3
What is the relative price of both goods under autarky ?
relative price = opportunity cost
- Pw / Pb = aw . w / ab . w = aw / ab =3
Let 𝑝𝐵 and 𝑝𝑊 be the prices of beer and wine as well as 𝑥𝐵 and 𝑥𝑊 the corresponding quantities.
Suppose p = pW / pB and x = xW + xW / xB + xB.
The relative world demand is given by p = 1/x.
Illustrate the (relative) demand for goods and the (relative) supply for goods in an
appropriate diagram
