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1、Lecture 2 (Chapter 2)Labor Productivity and Comparative Advantage:The Ricardian ModelDifferences in the technology of productionLet us consider the example of trade between Portugal and England, as described by David Ricardo. Ricardo considered just two commodities, wine and cloth. Ricardo allowed P
2、ortugal to have an absolute advantage in the production of both goods. Portugals absolute advantage may reflect, for example, its more favorable climate for both growing grapes and grazing sheep. Even though Portugal can produce wine and cloth more easily than Englnnd, England is still able to produ
3、ce both cloth and wine, but it is relmivelv more difficult to produce wine in England than cloth: as any visitor to England will know, it lacks the regular sunshine needed to produce good grapes! From this example, we can see that a country has coniDarativc advantaKc in those goods that it produces
4、best as compared to how well it produces other goods. That is, Portugal is better at producing wine than cloth, and England is better is producing cloth than wine, even though Portugal is better than England at producing both goods.The Concept of Comparative Advantage using a modern exampleOn Valent
5、ines Day the U.S. demand for roses is about 10 million roses.Growing roses in the U.S. in the winter is difficult. Heated greenhouses should be used. The costs fbr energy, capital, and labor are substantial.Resources fbr the production of roses could be used to produce other goods, say computers.Pro
6、duction possibilities fbr a given amount of resources in each countryRoses (in millions)Computers (in thousands)U.S.10100Mexico1030Suppose that in U.S. 10 million roses can be produced with the same resources as 100 thousand computers. In Mexico 10 million roses can be produced with the same resourc
7、es as 30 thousand computers. Note that resources used in making 10 million roses in U.S are not necessarily equal to the resources employed to make that many roses in Mexico. In this example Mexico is relatively less productive in computer production compared to U.S.- the higher the productivity in
8、export industry (i.e., /cilc fbr home country) the higher the wage rate. Because there are technological differences between the two countries, trade in goods docs not make the wages equal across the two countries. A country with absolute advantage in both goods will enjoy a higher wage after trade.
9、Solving for Wages Across CountriesUnit Labor RequirementCheeseWineHomeqHome produces and exports chccsc, so wc can think of Home workers being paid in terms of that good: their real wage is MPLc = 1 pound of chccsc. Wc refer to this payment as a real wage because it is measured in terms of a good th
10、at workers consume and not in terms of money. The workers can then sell the cheese they earn on the world market at the relative price of (Pc / Pw)World = 1. Thus, their real wage in tenns of units of wine is (Pc / Pw)Wor,d MPLc = (1) 1 = 1 gallons.HomeqHome produces and exports chccsc, so wc can th
11、ink of Home workers being paid in terms of that good: their real wage is MPLc = 1 pound of chccsc. Wc refer to this payment as a real wage because it is measured in terms of a good that workers consume and not in terms of money. The workers can then sell the cheese they earn on the world market at t
12、he relative price of (Pc / Pw)World = 1. Thus, their real wage in tenns of units of wine is (Pc / Pw)Wor,d MPLc = (1) 1 = 1 gallons. the Home wage is:MPLc = 1 pound of chccscor(Pc / Pw)World MPLc = 1 gallons of wine (0.5 without trade)Foreign produces and exports wine, and the real wage is MPL、= 1/3
13、 gallons of wine. Because wine workers can sell the wine they cam fbr cheese on the world market at the price of 1, their real wage in terms of units of cheese is (Pw / Pc)Workl .MPL w = 1/3 pounds.Thus, the Foreign wage is(Pw / Pc)Wor,d MPL*w = 1/3 pound of chccsc (0.167 without trade)orMPLw = 1/3
14、gallons of wineForeign workers earn less than Home workers as measured by their ability to purchase either good. = I hour per poundaLW = 2 hours per gallonForeignac = 6 hours per poundav = 3 hours per gallonPredictions of the Ricardian Model: With free trade countries specialize (completely) in good
15、(s) with lower opportunity cost of production (or relatively higher labor productivity), export excess production in those sectors and import the other goods. Free trade increases the national (and the individual) welfare (consumption, income or wage rates) in all trading countries. No one will be w
16、orse off.But we do not see extreme specialization in the real worldThere arc three main reasons:1. In reality MPL is not constant as assumed in the model. That makes PPF nonlinear. That is opportunity cost might be increasing. So a product with comparative advantage before trade may lose its comparative advantage as more of it is produced after trade. This is likely to happen when we have more tha
