Costs_of_Globalization__Lesson_16_ - Winners and Losers All...

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Lesson 16 1
Winners and Losers
All workers in a Ricardian model benefit
from trade
Casual observation and empirical evidence
suggest that some workers are harmed by
trade
How can we model the economy so that
trade harms some while benefiting others?
Lesson 16 2
Simplified version of Ricardo-Viner
(specific-factors) model
Assume two goods ( X and Y )
Assume two factors of production:
-labor that can only be used to produce X ( L
X
)
-labor that can only be used to produce Y ( L
Y
)
Lesson 16 3
The full employment conditions
L XX X
aQ L =
L YY Y
=
X
X
LX
L
Q
a
=
Y
Y
LY
L
Q
a
=

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Lesson 16 4
X
Q
Y
Q
X
LX
L
a
Y
LY
L
a
The Production Possibilities Frontier
Lesson 16 5
X
Q
Y
Q
X
LX
L
a
Y
LY
L
a
All points encompassed by the dashed rectangle
are feasible
Lesson 16 6
X
Q
Y
Q
X
LX
L
a
Y
LY
L
a
But both types of labor are fully employed only
at when production is at northeast corner of the
PPF

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Lesson 16 7
X
Q
Y
Q
X
LX
L
a
Y
LY
L
a
At full employment, the quantity of X produced
does not depend on relative price
Lesson 16 8
X
Q
X
S
X
LX
L
a
Y
X
P
P
Lesson 16 9
X
Q
X
S
Add demand to determine relative price:
X
D
2
X
LX
L
a
Y
X
P
P

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Lesson 16 10
Recall properties of consumption possibilities
frontier
Slope =
X
Y
P
P
−
The production point always lies on the