Technology: Classical approach Flashcards
What are our assumptions in Ricardos model?
2 countries 2 goods 1 production factor: labour Constant restuns to scale Perfect competition Free labour mobility between sectors but not countries
What do we denote the 2 goods by?
X and Y
What do we denote the marginal product of labour by?
What does the marginal product mean?
alpha (for X) and beta (for Y)
MPL means how much extra product we will get by increasing labour w. one unit.
High MPL is good
How do we denote the labour constraint and what is it?
L (bar) and it is the total labour force in at country.
L(bar) = L(x) + L(y)
What is the production possibility frontier?
How is it structured?
It shows the diffrent combinations of efficient production given the available factors of production and state of technology
Goods on Y- and X-axis, PPF is a straight line
What is the max Q och X and/or Y?
alphaL(bar) and betaL(bar)
What does opportunity cost mean in this model and what does the equation look like?
Opportunity cost: how many units of Y do we need to give up to produce one more unit of X (vice versa)
Marginal rate of tranformation (MRT)= - deltaY / deltaX = beta/alpha
In this case this is the opportunity cost for X
How do we compare absolute advantage?
How do we see who has a comparative advantages?
Absolute: Comparing the countries’ marginal products in each sector.
Ex. alpha(home) < alpha(foreign) means that foreign has an absolute advantage in X.
Comparative: comparing the ratios of the marginal products of labour (alpha and beta)
Ex. alpha(H)/beta(H) < alpha(F)/beta(F) means that Foreign has a comparative advantage in X
What does the marginal products also reflect? Why?
Since we have constant returns to scale and perfect competition, the ratios of MP equals the relative prices. Since we have free mobility, the wages have to be equal:
w(x)=w(y)’
w(x)=P(x)MP(LX) w(y)=P(y)MP(LY)
w(x)=w(y) and P(x)/P(y)=MP(LY)/MP(LX)
w(X) = P(X)*alpha
When 2 countries go from autarky to trade, what will happen to the prices?
Prices of goods will lie between the two autarky price ratios
What is real wage?
What is the individuals budget line?
It is how mych goods you can buy with nominal income: nominal wage (w) divided by price of good: w/p
Budget line (real wage): How much Y we can by after producing our X Y=w/p(Y) - p(X)*X
Notera: Bara en nominal wage per land!
Who tend to benefit the most from trade?
smaller countries since larger countries have larger effects on the world price
