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International Trade > Topic 2: The Ricardian Model of Trade > Flashcards

Topic 2: The Ricardian Model of Trade Flashcards

1
Q

The Ricardian model examines differences in the productivity of labor (due to differences in ……..) between countries.

A

technology

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2
Q

The Ricardian model uses the concepts of ………… ….
and ………… …………..

A

Opportunity cost and comparative advantage

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3
Q

An overall production ………… and countries benefit from trade
if each specialises in the production of the good they have a
…………… …………….. in.

A

An overall production increases and countries benefit from trade
if each specializes in the production of the good they have a
comparative advantage in.

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4
Q

a one-factor Ricardian model uses the
following assumptions:

A
  1. Labour is the only factor of production
  2. Labour productivity varies across countries due to
    differences in technology, but labour productivity in
    each country is constant
  3. The supply of labour in each country is constant
  4. Two goods: wine and cheese (new Eric examples!)
  5. Competition allows workers to be paid a “competitive”
    wage equal to the value of what they produce, and
    allows them to work in the industry that pays the
    highest wage
  6. Two countries: home and foreign
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5
Q

A high unit labour requirement means low ………. ………….

A

labour
productivity

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6
Q

Gains from trade come from ……….. 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

A

specialising

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7
Q

Before any trade occurs, the ……… …… of cheese
to wine reflects the opportunity cost of cheese in
terms of wine in each country

A

Relative price

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8
Q

“…….. ……….. …. ……………” means producing
a good in which a country has a comparative
advantage

A

Using resources most efficiently

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9
Q

Relative demand of good A is the quantity of
good A demanded in all countries relative to
the quantity of good .. demanded in all
countries

A

B

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10
Q

EU membership raises overall bloc trade by …..%
after .. years

A

41.2% after 15 years

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11
Q

GDP gains of 26.1% EU overall, …..% for the UK
since joining

A

25.5%

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12
Q

Relative wages are the wages of the home country
relative to the wages in the ……… country

A

Foreign

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13
Q

Productivity (………..) differences determine
relative wage differences across countries

A

technological

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14
Q

Evidence shows that
low wages are
associated with …
productivity

A

low

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15
Q

even an unproductive country ……… from free
trade by avoiding the high costs for goods that it would
otherwise have to produce domestically

A

benefits

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16
Q

The benefits of free trade do not depend on …………..
advantage, rather they depend on ……………
advantage: specialising in industries that use resources
most efficiently

A

absolute / comparative

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17
Q

While trade may reduce wages for some workers, thereby
affecting the distribution of income within a country,
trade benefits …………. and other workers

A

consumers

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18
Q

While labour standards in some countries are less than
exemplary compared to Western standards, they are so ….. … ………. …….

A

with or without trade

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19
Q

The Ricardian model predicts that countries
completely specialise in production
* But this rarely happens for three main
reasons:

A
  1. More than one factor of production reduces the
    tendency of specialisation
  2. Protectionism
  3. Transportation costs reduce or prevent trade,
    which may cause each country to produce the
    same good or service
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20
Q

Partial equilibrium analysis

A

To study a single market

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21
Q

General equilibrium analysis

A

Takes account of the linkages between the two markets

22
Q

What are opportunity costs?

A

The costs associated with the trade-off between using resources for production.

23
Q

What does the difference in opportunity costs offer?

A

The possibility of a mutually beneficial rearrangement of world production.

24
Q

Explain the relationship between international trade and comparative advantage

A

International trade allows each country to specialize in producing the good in which it has a comparative advantage. If the opportunity cost of producing that good in terms of the other goods is lower in that country than in other countries.

25
Q

When can trade between two countries benefit both countries?

A

If each country exports the goods in which it has a comparative advantage.

26
Q

What is the main assumption behind the Ricardian model?

A

International trade is solely due to international differences in the productivity of labor.

27
Q

How is labor productivity expressed?

A

In terms of the unit labor requirement, which is the number of hours of labor required to produce one unit of a good. It is the inverse of productivity.

28
Q

What does the production possibilities frontier show?

A

The trade-offs made for production (because resources are limited) illustrated graphically. When the PPF is a straight line, the opportunity cost of x in terms of y is constant: a_LX/a_LY.

29
Q

Give an example of a function of the limits on production.

A

A_LCQc + a_LWQw <= L

30
Q

How are wages determined?

A

Px/a_Lx and Py/a_Ly. The wages for sector x will be higher when Px/Py > a_Lx/a_Ly. The economy will specialize in x.

31
Q

When does a country have an absolute advantage?

A

When one country can produce a unit of a good with less labor than another country.

32
Q

What does the world general equilibrium require?

A

Relative supply = relative demand

33
Q

Describe the pattern of the RS curve

A

There is no supply of x if the world price dropped below a_Lx/a_Ly. When Px/Py = a_Lx/a_Ly, Home is willing to supply any relative amount of goods and this corresponds to a flat section of the curve. The RS of x is (L/a_Lx)/(L/a_Ly) for any relative price between a_Lx/a_Ly and a_Lx/a_Ly. For Px/Py > a_Lx/a_Ly, both countries specialize in x.

34
Q

Think of trade as an ………. method of production

A

indirect

35
Q

How does international trade influence the relative wage rate?

A

The wage rate lies between the ratios of the two countries’ productivities in the two industries because the relative wage between the relative productivities that each country ends up with a cost advantage in one good.

36
Q

Discuss the myth: free trade is beneficial only if your country is strong enough to stand up to foreign competition.

A

The gains from free trade depend on comparative advantage rather than absolute advantage and comparative advantage does not only depend on productivity but also on the domestic wage rate compared to the foreign wage rate.

37
Q

Discuss the myth: foreign competition is unfair and hurts other countries when it is based on low wages.

A

Lower costs of production can be due to high productivity or low wages.

38
Q

Discuss the myth: trade exploits a country’s workers and makes it worse off if its workers receive much lower wages than workers in other nations.

A

To deny the opportunity to export and trade might well be to condemn them to even deeper poverty.

39
Q

When is it cheaper in Home to produce in a model with many goods?

A

Wa_Li < wa_Li
a_Li/a_Li > w/w
w: wage rate
a_Li home unit labor requirement

40
Q

How is the relative wage determined in the multigood model?

A

The equilibrium relative wage is determined by the intersection of RS and RD.

41
Q

When will the relative demand for Home labor fall?

A

When the ratio of Home to Foreign wages rises

42
Q

As Home labor becomes more expensive relative to Foreign labor:

A

Goods produced in Home will become relatively more expensive, and world demand for these goods will fall.

43
Q

Why is the actual international economy not as extreme as shown in the Ricardian Model of Trade?

A
  1. The existence of more than one factor of production reduces the tendency towards specialization.
  2. Countries sometimes protect industries from foreign competition
  3. It is costly to transport goods and services
44
Q

What are misleading predictions of the Ricardian model?

A
  1. The model predicts an extreme degree of specialization.
  2. The model assumes away effects of international trade on the distribution of income within countries, that countries will gain as a whole.
  3. The model allows no role for differences in resources among countries as a cause of trade.
  4. The model neglects the possible role of economies of scale as a cause of trade.
45
Q

Opportunity cost equals the ………. …… of the slope of the PPF

A

Absolute value

46
Q

In terms of unit labour requirement, the opportunity cost of cheese in terms of wine is:

A

a_LC / a_LW

47
Q

3 Misconceptions about Comparative Advantage:

A
  1. Free trade is beneficial only if a country is more
    productive than foreign countries
  2. Free trade with countries that pay low wages
    hurts high wage countries
  3. Free trade exploits less productive countries
48
Q

Explain the misconception about comparative advantage: Free trade is beneficial only if a country is more productive than foreign countries

A

– But even an unproductive country benefits from free trade by avoiding the high costs for goods that it would otherwise have to produce domestically
– High costs derive from inefficient use of resources
– The benefits of free trade do not depend on absolute advantage, rather they depend on comparative advantage: specialising in industries that use resources most efficiently

49
Q

Explain the misconception about comparative advantage: Free trade with countries that pay low wages hurts high wage countries

A

– While trade may reduce wages for some workers, thereby affecting the distribution of income within a country, trade benefits consumers and other workers
– Consumers benefit because they can purchase goods more cheaply
– Producers/workers benefit by earning a higher income in the industries that use resources more efficiently, allowing them to earn higher prices and wages

50
Q

Explain the misconception about comparative advantage: Free trade exploits less productive countries

A

Free trade exploits less productive countries– While labour standards in some countries are less than exemplary compared to Western standards, they are so with or without trade.
– Are high wages and safe labour practices alternatives to trade? Deeper poverty and exploitation (ex., involuntary prostitution) may result without export production.
– Consumers benefit from free trade by having access to cheaply (efficiently) produced goods.
– Producers/workers benefit from having higher profits/wages – higher compared to the alternative.

International Trade (5 decks)

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