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1、Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-1Lecture 2: Labor productivity and comparative advantage: the Ricardian modelreadingK&O(2011),International Economics: Theory and Policy . Chap.3 许斌国际贸易:专栏1.1李嘉图和英国的谷物法p27余淼杰：国际贸易学理论、政策与实证，第二章第4节“比较优势理论中的工资与价格的决定”，P27Warm up:Copyright 2006
2、 Pearson Addison-Wesley. All rights reserved.3-2Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-3Outline of Lecture2Opportunity costs and comparative advantageA one factor Ricardian modelProduction possibilities frontier (PPF)Gains from tradeWages and tradeMisconceptions about comparati
3、ve advantagecomparative advantage with many goods.(not required) Empirical evidenceCopyright 2006 Pearson Addison-Wesley. All rights reserved.3-4IntroductionThe Ricardian model is based on technological differences across countries.Could you suggest some variables to reflect the technological differ
4、ence? These technological differences are reflected in differences in the productivity of labor.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-5Opportunity costs and comparative advantageThe Ricardian model uses the concepts of opportunity cost to reflect comparative advantage.Whats th
5、e opportunity cost?The opportunity cost of producing something measures the cost of not being able to produce something else.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-6Opportunity costs and comparative advantage (cont.)For example, a limited number of workers could be employed to
6、produce either roses or computers.A country faces a trade off: how many computers or roses should it produce with the limited resources that it has?Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-7Opportunity costs and comparative advantage (cont.)Suppose that in the US 10 million roses
7、 can be produced with the same resources that could produce 100,000 computers.Suppose that in Peru 10 million roses can be produced with the same resources that could produce 30,000 computers.Quick answer: whats the opportunity cost of producing rose in Peru?Is the opportunity cost for Peru to produ
8、ce roses higher or lower comparing with US? Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-8A One Factor Ricardian ModelThe simple example with roses and computers explains the intuition behind the Ricardian model.We formalize these ideas by constructing a slightly more complex one fac
9、tor Ricardian model using the following simplifying assumptions: Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-9A One Factor Ricardian Model (cont.)1.Labor is the only resource important for production.2.Labor productivity varies across countries, usually due to differences in technol
10、ogy, but labor productivity in each country is constant across time.3.The supply of labor in each country is constant.4.Only two goods are important for production and consumption: wine and cheese.5.Perfect Competitive market.6.Only two countries are modeled: domestic and foreign.Copyright 2006 Pear
11、son Addison-Wesley. All rights reserved.3-10A One Factor Ricardian Model (cont.)Because labor productivity is constant, define a unit labor requirement as the constant number of hours of labor required to produce one unit of output.aLW is the unit labor requirement for wine in the domestic country.
12、For example, if aLW = 2, then it takes 2 hours of labor to produce one liter of wine in the domestic country.aLC is the unit labor requirement for cheese in the domestic country. For example, if aLC = 1, then it takes 1 hour of labor to produce one kg of cheese in the domestic country.Quick answer:
13、A high unit labor requirement means low labor productivity or high labor productivity?.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-11A One Factor Ricardian Model (cont.)Because the supply of labor is constant, denote the total number of labor hours worked in the domestic country as
14、a constant number L. Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-12Production Possibilities FrontierWhats production possiblity frontier?The production possibility frontier (PPF) of an economy shows the maximum amount of a goods that can be produced for a fixed amount of resources.I
15、f QC represents the quantity of cheese produced and QW represents the quantity of wine produced, then the production possibility frontier of the domestic economy has the equation:aLCQC + aLWQW = LTotal units of wine productionLabor required for each unit of cheese productionTotal units of cheese pro
16、ductionLabor required for each unit of wine productionTotal amount of labor resourcesCopyright 2006 Pearson Addison-Wesley. All rights reserved.3-13Production Possibilities Frontier(cont.)Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-14Production Possibilities Frontier(cont.)When the
17、economy uses all of its resources, the opportunity cost is equal to the absolute value of the slope of the PPF, and it is constant when the PPF is a straight line.( Why PPF is usually a straight line in one factor model?)Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-15Production Possi
18、bilities Frontier(cont.)In general, the amount of the domestic economys production is defined by aLCQC + aLWQW LPPF describes what an economy can produce, but how to determine what the economy does produce?We must determine the prices of goods.Copyright 2006 Pearson Addison-Wesley. All rights reserv
19、ed.3-16Production, Prices and WagesLet PC be the price of cheese and PW be the price of wine.Because of competition, hourly wages of cheese makers are equal to the market value of the cheese produced in an hour: Pc /aLChourly wages of wine makers are equal to the market value of the wine produced in
20、 an hour: PW /aLWBecause workers like high wages, they will work in the industry that pays a higher hourly wage.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-17Production, Prices and Wages (cont.)If PC /aLC PW/aLW , what will happen?workers will make only cheese.It is the same case if
21、 PC /PW aLC /aLW , workers will only make cheese.The economy will specialize in cheese production if the price of cheese relative to the price of wine exceeds the opportunity cost of producing cheese.If PC /aLC aLW /aLC workers will only make wine.The economy will specialize in wine production if th
22、e price of wine relative to the price of cheese exceeds the opportunity cost of producing wine.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-18Production, Prices and Wages (cont.)If the domestic country wants to consume both wine and cheese (in the absence of international trade), wha
23、t the condition it requires ? relative prices must adjust so that wages are equal in the wine and cheese industries. PC /aLC = PW /aLW If PC /aLC = PW /aLW workers will have no incentive to flock to either the cheese industry or the wine industry, thereby maintaining a positive amount of production
24、of both goods.Or if PC /PW = aLC /aLW , production (and consumption) of both goods occurs when relative price of a good equals the opportunity cost of producing that good.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-19Trade in the Ricardian ModelSuppose that the domestic country has
25、a comparative advantage in cheese production: its opportunity cost of producing cheese is lower than it is in the foreign country.aLC /aLW a*LC /a*LW where “*” notates foreign country variablesWhen the domestic country increases cheese production, it reduces wine production less than the foreign cou
26、ntry does because the domestic unit labor requirement of cheese production is low compared to that of wine production. Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-20Trade in the Ricardian Model (cont.)Note a country can be more efficient in wine and cheese production both.It has an
27、absolute advantage in all production: its unit labor requirements for wine and cheese production are lower than those in the foreign country: aLC a*LC and aLW a*LWBut it will have a comparative advantage in only one goodthe good that uses resources most efficiently compared to alternative production
28、.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-21Trade in the Ricardian Model (cont.)How about the specialization?Relative world priceRelative supplyRelative demandCopyright 2006 Pearson Addison-Wesley. All rights reserved.3-22Relative Supply and Relative DemandNext we consider relati
29、ve supply of cheese: the quantity of cheese supplied by all countries relative to the quantity of wine supplied by all countries at each relative price of cheese, Pc /PW.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-23Relative Supply and Relative Demand(cont.)To calculate relative pri
30、ces with trade, we first calculate relative quantities of world production: (QC + Q*C )/(QW + Q*W)Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-24Relative Supply and Relative Demand (cont.)There is no supply of cheese if the relative price of cheese falls below aLC /aLW .Why? because
31、the domestic country will specialize in wine production whenever PC /PW aLC /aLW And we assumed that aLC /aLW Pc /PW aLC /aLW , domestic workers specialize in cheese production because they can earn higher wages, but foreign workers will still produce only wine.When a*LC /a*LW = PC / PW, foreign wor
32、kers will be indifferent between producing wine or cheese, but domestic workers will still produce only cheese.There is no supply of wine if the relative price of cheese rises above a*LC /a*LW Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-26Relative Supply and Relative Demand (cont.)
33、aLC/aLWa*LC/a*LWRSRelative priceof cheese, PC/PWRelative quantityof cheese, QC + Q*C QW + Q*WL/aLCL*/a*LWCopyright 2006 Pearson Addison-Wesley. All rights reserved.3-27Relative Supply and Relative Demand (cont.)Relative demand of cheese is the quantity of cheese demanded in all countries relative to
34、 the quantity of wine demanded in all countries at each relative price of cheese, PC /PW.As the relative price of cheese rises, consumers in all countries will tend to purchase less cheese and more wine so that the relative quantity of cheese demanded falls.Copyright 2006 Pearson Addison-Wesley. All
35、 rights reserved.3-28Relative Supply and Relative Demand (cont.) RD1aLC/aLWa*LC/a*LWRSRelative priceof cheese, PC/PWRelative quantityof cheese, QC + Q*C QW + Q*WL/aLCL*/a*LWCopyright 2006 Pearson Addison-Wesley. All rights reserved.3-29Relative Supply and Relative Demand (cont.) Copyright 2006 Pears
36、on Addison-Wesley. All rights reserved.3-30Gains From TradeGains from trade come from specializing in production that use resources most efficiently, and using the income generated from that production to buy the goods and services that countries desire.where “using resources most efficiently” means
37、 producing a good in which a country has a comparative advantage.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-31Gains From Trade (cont.)Think of trade as an indirect method of production or a new technology that converts cheese into wine or vice versa.Without the trade, a country has
38、 to allocate resources to produce all of the goods that it wants to consume.With the trade, a country can specialize its production and trade (“convert”) the products for the goods that it wants to consume.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-32Gains From Trade (cont.)We show
39、 how consumption possibilities expand beyond the production possibility frontier when trade is allowed.Without trade, consumption is restricted to what is produced.With trade, consumption in each country is expanded because world production is expanded when each country specializes in producing the
40、good in which it has a comparative advantage.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-33Gains From Trade (cont.)Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-34A Numerical ExampleQuick answer: what is its opportunity cost of producing cheese for domestic country? U
41、nit labor requirements for domestic and foreign countriesCheeseWineDomesticaLC = 1 hour/kgaLW = 2 hours/LForeigna*LC = 6 hours/kga*Lw = 3 hours/LCopyright 2006 Pearson Addison-Wesley. All rights reserved.3-35A Numerical Example (cont.)aLC /aLW = 1/2 a*LC /a*LW = 2The domestic country is more efficie
42、nt in both industries, but it has a comparative advantage only in cheese production.The foreign country is less efficient in both industries, but it has a comparative advantage in wine production.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-36A Numerical Example (cont.)With trade, th
43、e equilibrium relative price of cheese must be between aLC /aLW = 1/2 and a*LC /a*LW = 2Suppose that PC /PW = 1 in equilibrium.In words, one kg of cheese trades for one liter of wine.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-37A Numerical Example (cont.)If the domestic country doe
44、s not trade, it can use one hour of labor to produce 1/aLW = 1/2 liter of wine.If the domestic country does trade, it can use one hour of labor to produce 1/aLC = 1 kg of cheese, sell this amount to the foreign country at current prices to obtain 1 liter of wine.If the foreign country does not trade
45、, it can use one hour of labor to produce 1/a*LC = 1/6 kg of cheese.If the foreign country does trade, it can use one hour of labor to produce 1/a*LW = 1/3 liter of wine, sell this amount to the domestic country at current prices to obtain 1/3 kg of cheese.Copyright 2006 Pearson Addison-Wesley. All
46、rights reserved.3-38Relative WagesRelative wages are the wages of the domestic country relative to the wages in the foreign country.What determine wage? DiscussCopyright 2006 Pearson Addison-Wesley. All rights reserved.3-39Do Wages Reflect Productivity?In the Ricardian model, relative wages reflect
47、relative productivities of the two countries.Is this an accurate assumption? Some argue that low wage countries pay low wages despite growing productivity, putting high wage countries at a cost disadvantage.But evidence shows that low wages are associated with low productivity.Copyright 2006 Pearson
48、 Addison-Wesley. All rights reserved.3-40Do Wages Reflect Productivity? (cont.)Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-41Do Wages Reflect Productivity? (cont.)Other evidence shows that wages rise as productivity rises.In 2000, South Koreas labor productivity was 35% of the US le
49、vel and its average wages were about 38% of US average wages.After the Korean War, South Korea was one of the poorest countries in the world, and its labor productivity was very low. In 1975, average wages in South Korea were still only 5% of US average wages.Copyright 2006 Pearson Addison-Wesley. A
50、ll rights reserved.3-42Misconceptions About Comparative Advantage Discussion 1:Free trade is beneficial only if a country is more productive than foreign countries.what do you think?But even an unproductive country benefits from free trade by avoiding the high costs for goods that it would otherwise
51、 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: specializing in industries that use resources most efficiently.Copyright 2006 Pearson Addison-Wesley. All rig
52、hts reserved.3-43Misconceptions About Comparative Advantage (cont.) Discussion 2: Free trade with countries that pay low wages hurts high wage countries.what do you think?While trade may reduce wages for some workers, thereby affecting the distribution of income within a country, trade benefits cons
53、umers and other workers.Consumers benefit because they can purchase goods more cheaply (more wine in exchange for cheese).Producers/workers benefit by earning a higher income (by using resources more efficiently and through higher prices/wages).Copyright 2006 Pearson Addison-Wesley. All rights reser
54、ved.3-44Misconceptions About Comparative Advantage (cont.)Discussion 3: Free trade exploits less productive countries. What do you think?While labor standards in some countries are less than exemplary compared to Western standards, they are so with or without trade.Are high wages and safe labor prac
55、tices alternatives to trade? Deeper poverty and exploitation (e.g., 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/wageshigher compared to
56、the alternative.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-45Empirical EvidenceDo countries export those goods in which their productivity is relatively high?The ratio of US to British exports in 1951 compared to the ratio of US to British labor productivity in 26 manufacturing ind
57、ustries suggests yes.At this time the US had an absolute advantage in all 26 industries, yet the ratio of exports was low in the least productive sectors of the US.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-46Empirical Evidence (cont.) Copyright 2006 Pearson Addison-Wesley. All rig
58、hts reserved.3-47Comparative Advantage With Many GoodsSuppose now there are N goods produced, indexed by i = 1,2,N.The domestic countrys unit labor requirement for good i is aLi, and that of the foreign country is a*Li Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-48Further reading: C
59、omparative Advantage With Many Goods (cont.)Goods will be produced wherever it is cheaper to produce them.Let w represent the wage rate in the domestic country and w* represent the wage rate in the foreign country.If waL1 w/w*If the relative productivity of a country in producing a good is higher th
60、an the relative wage, then the good will be produced in that country. Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-49Comparative Advantage With Many Goods (cont.)Suppose there are 5 goods produced in the world:Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-50Comparative
61、 Advantage With Many Goods (cont.)If w/w* = 3, the domestic country will produce apples, bananas, and caviar, while the foreign country will produce dates and enchiladas.The relative productivities of the domestic country in producing apples, bananas and caviar are higher than the relative wage.Copy
62、right 2006 Pearson Addison-Wesley. All rights reserved.3-51Comparative Advantage With Many Goods (cont.)If each country specializes in goods that use resources productively and trades the products for those that it wants to consume, then each benefits.If a country tries to produce all goods for itse
63、lf, resources are “wasted”. The domestic country has high productivity in apples, bananas, and caviar that give it a cost advantage, despite its high wage.The foreign country has low wages that give it a cost advantage, despite its low productivity in dates.Copyright 2006 Pearson Addison-Wesley. All
64、 rights reserved.3-52Comparative Advantage With Many Goods (cont.)How is the relative wage determined?By the relative supply and relative (derived) demand for labor services.The relative (derived) demand for domestic labor services falls when w/w* rises. As domestic labor becomes more expensive rela
65、tive to foreign labor,goods produced in the domestic country become more expensive, and demand for these goods and the labor to produce them falls.fewer goods will be produced in the domestic country, further reducing the demand for domestic labor. Copyright 2006 Pearson Addison-Wesley. All rights r
66、eserved.3-53Comparative Advantage With Many Goods (cont.)Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-54Comparative Advantage With Many Goods (cont.)Suppose w/w* increases from 3 to 3.99:The domestic country would produce apples, bananas, and caviar, but the demand for these goods an
67、d the labor to produce them falls as the relative wage rises.Suppose w/w* increases from 3.99 to 4.01:Caviar is now too expensive to produce in the domestic country, so the caviar industry moves to the foreign country, causing a discrete (abrupt) drop in the demand for domestic labor.Consider simila
68、r effects as w/w* rises from 0.75 to 10. Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-55Comparative Advantage With Many Goods (cont.)Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-56Comparative Advantage With Many Goods (cont.)Finally, suppose that relative supply of la
69、bor is independent of w/w* and is fixed at an amount determined by the populations in the domestic and foreign countries.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-57Comparative Advantage With Many Goods (cont.) Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-58Summary
70、1.A country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than it is in other countries. A country with a comparative advantage in producing a good uses its resources most efficiently when it produces that good compared to prod
71、ucing other goods.2.The Ricardian model focuses only on differences in the productivity of labor across countries, and it explains gains from trade using the concept of comparative advantage.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-59Summary (cont.)3.When countries specialize and
72、 trade according to the Ricardian model; the relative price of the produced good rises, income for workers rises and imported goods are less expensive for consumers.4.Trade is predicted to benefit both high productivity and low productivity countries, although trade may change the distribution of in
73、come within countries.5.High productivity or low wages give countries a cost advantage that allow them to produce efficiently. Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-60Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-61Summary (cont.)7.Although empirical evidence su
74、pports trade based on comparative advantage, transportation costs and other factors prevent complete specialization in production.Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-62Copyright 2006 Pearson Addison-Wesley. All rights reserved.3-63Copyright 2006 Pearson Addison-Wesley. All r
75、ights reserved.3-64Class discussionplease assess Ricardian model.Group discussion after class Does the rising labor costs impact Chinas comparative advantage? What should we do?Hint:Compare China labor productivity and labor costFactories relocation happened in China during these years Lewis turning point
