Trade and Technology Flashcards
Environment for Ricardian Model
1) 2 Goods: X and Y, e.g. Wheat and Cloth
It is also described as 2 industries.
(2) 2 Countries: Home (H) and Foreign (F)
(3) 1 (input) factor: Labour (L)
Labour is fully employed.
Labour is perfectly mobile across Goods (Industries), but NOT mobile
across countries (No international migration).
Total labour can be different across countries (This does not affect our
analysis of trade pattern).
(4) Identical preferences across countries
(5) Free trade
No tariffs or non-tariff barriers, or any transportation cost and etc.
(6) Balanced trade
The value of exports is equal to the value of imports.
(7) Technology is different across countries and is denoted by output per worker
Absolute Advantage
Country has AA in the product that it has a larger output per worker, country exports product it has AA in.
If there is AA in both industries trade will be engaged in through comparative advantage to analyse the international trade
PPF
Various combinations of goods that are produced with all resources and efficient technology
Opportunity Cost
OC of X is the units of Y foregone to produce one unit of X
OX (X) = output per worker for Y / Output per worker for X
Country has the CA in the product that has a lower OC
Autarky Equilibrium
In Autarky, the PPF acts as the income budget of a country, all combinations beyond PPF are not attainable
Indifference Curve
A representation of various combinations of two goods with which will equally satisfy a consumer.
Higher IC means higher utility and welfare
Equilibrium point
The tangent point between the PFF and IC is the equilibrium point.
The point where production and consumption meet
Relative prices in autarky
At the equilibrium the relative price of X is equal to the absolute value of the slope of the PPF
Conditions:
1. Wages are equal in two industries because labour is mobile across industries, X has higher wage labour moves out of Y = surplus labour wages decrease and so on.
- Firms are under perfect competition.
Price of X is equal to the marginal cost of X
Py= w x 1/ output per worker for Y the marginal product of labour is equal to the output per worker.
How does relative prices affect trade
PX/PY = output per worker for Y / Output per worker for X
When countries have a higher relative price it suggests that X will be more expensive in that country meaning cheaper will export
Trade patterns
Country exports the product it has CA
Country imports product it has comparative disadvantage in
Free trade equilibrium and world price
World price is determined by the world market demand and supply and is exogenously given meaning it is determined by the model.
Specialisation
World price of X is larger than H’s price and lower than F’s price
For H, X is more expensive in the world market so will export X but F will import from world market rather than X.
Exports cause production in X moving production point along PPF until axis and will not produce Y causing specialisation in X
Trade Equilibrium: Consumption
Due to trade the budget is now relaxed
The new budget is the world price line, which crosses the specialisation point with the slope
Free trade equilibrium is tangent between new budget and IC (see graphs)
Trade triangles
Country H consumes less X than it produces and F consumes more X than it produces (BD = CD)
Country F’s export of Y is equal to country H’s import of Y. (CD = BD)
Two trade triangles should be the shame (See figure 4)
Trade gains
(1) Both countries are better off because both countries have arrived at higher ICs.
C (C∗) is at higher indifference curve than A (A∗).
(2) This consumption point is not attainable in autarky, but because of trade it is attainable.
