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Unformatted text preview: Chapter 03 The Classical World of David Ricardo and Comparative Advantage CHAPTER 3 THE CLASSICAL WORLD OF DAVID RICARDO AND COMPARATIVE ADVANTAGE Learning Objectives: To understand comparative advantage as a basis for trade between nations. To identify the difference between comparative advantage and absolute advantage. To quantify the gains from trade in a two-country, two-good model. To recognize comparative advantage and the potential gains from trade using production- possibilities frontiers. I. Outline Introduction- Some Common Myths Assumptions of the Basic Ricardian Model Ricardian Comparative Advantage Comparative Advantage and the Total Gains from Trade- Resource Constraints- Complete Specialization Representing the Ricardian Model with Production-Possibilities Frontiers- Production-Possibilities An Example- Maximum Gains from Trade Comparative Advantage Some Concluding Observations Summary II. Special Chapter Features Titans of International Economics: David Ricardo (1772-1823) In the Real World: Export Concentration of Selected Countries III. Purpose of Chapter The purpose of this chapter is to introduce students to the basic idea of Classical comparative advantage, demonstrate the gains from trade, and explain why trade will lead a country to specialize in production of its export good(s). 3-1 Chapter 03 The Classical World of David Ricardo and Comparative Advantage IV. Teaching Tips A. This chapter begins with a look at some common myths about international trade. An examination of these myths can be a nice stimulus to class discussion. It is useful to begin with a list of misconceptions about trade that can gradually be dispelled in the coming chapters. B. This chapter should be used to develop a good understanding of comparative advantage. This is perhaps best accomplished by giving the class several different examples of two-country by two-commodity examples similar to those in the text, pointing out when there is a basis for trade. C. This is also a good place to drive home the idea that the international terms of trade must lie between the autarky price ratios of the two countries if both countries are to gain from trade. D. After the class is comfortable with the basic idea of comparative advantage, then move on to demonstrate the overall country gains from trade. We find it useful to demonstrate the country gains from trade in two different ways in a numerical example with fixed resources and with a production-possibilities frontier. E. It is important to demonstrate comparative advantage using the PPF because it not only allows one to generalize beyond the labor theory of value (to opportunity cost in general), but also demonstrates that trade allows a country to consume beyond its PPF. Using the PPF thus provides a good transition between the Classical model and the upcoming neoclassical presentation....
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- Spring '08
- Comparative Advantage