Chp-2 - 2 Trade and Technology The Ricardian Model and...

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Trade and Technology: The Ricardian Model and Classical Theories 2
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In this chapter we will: learn the reasons why countries trade, distinguish between absolute and comparative advantage , understand the Ricardian model , understand the no-trade equilibrium using each country’s PPF and indifference curve , solve for wages across countries, solve for international prices , and derive the home export supply and Foreign import demand curve and how to arrive at international trade equilibrium . Introduction 2
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Differences in the technology used in each country (i.e., differences in each country’s ability to manufacture products) Differences in the total amount of resources (including labor, capital, and land) found in each country Differences in the costs of offshoring (i.e., producing the various parts of a good in different countries and then assembling it in a final location) The proximity of countries to each other (i.e., how close they are to one another) Introduction Reasons countries trade goods with each other 3
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In this chapter, we focus on technology differences across countries as an explanation for trade, called the Ricardian model. The Ricardian model explains how the level of a country’s technology affects its trade pattern . It also explains the concept of comparative advantage and why it works as an explanation for trade patterns. Introduction 4
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1 Reasons for Trade Absolute Advantage When a country has the best technology for producing a good, it has an absolute advantage in the production of that good. Absolute advantage is not a good explanation for trade patterns. Comparative Advantage Instead, comparative advantage is the primary explanation for trade among countries. A country has comparative advantage in producing those goods that it produces best compared with how well it produces other goods. 5
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The Home Country 2 Ricardian Model To develop a Ricardian model of trade, we will use an example with two goods: Wheat and Cloth For simplicity, we ignore the role of land and capital and suppose that both goods are produced with labor alone. 6
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The Home Country 2 Ricardian Model We assume that labor is the only resource used to produce goods. The marginal product of labor (MPL) is the extra output obtained by using one more unit of labor. In Home, one worker produces 4 bushels of wheat, so MPL W = 4. Alternatively, one worker can produce 2 yards of cloth, so MPL C = 2. 7
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The Home Country Home Production Possibilities Frontier We can graph Home’s production possibilities frontier (PPF) using the marginal products for wheat and cloth. The slope of the PPF is also the opportunity cost of wheat, the amount of cloth that must be given up to obtain one more unit of wheat.
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