Econ_433_s10_lec3 - Advanced International Trade Lecture 3...

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Advanced International Trade Lecture 3 Prof. Tybout January 19, 2010
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2 Lecture outline Trade theory basics The Ricardian model: brief recap The Ricardian model: numerical example Terms of trade The Ricardian model with increasing returns Relevant reading: Feenstra and Taylor, chapter 2. First homework assignment to be posted; due next Tuesday, January 26.
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3 Last time : the Ricardian model Technology The world is made up of Two agrarian economies, Each economy can produce 2 goods: pork ( P ) and beans ( B ) Single input: labor ( L ) Constant returns production technologies. Perfect competition Tastes Identical, homothetic tastes
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4 The Ricardian model: Production Home (United States) Workers per unit output Pork a p = 1/ MPL p Beans a b = 1 /MPL b Foreign (Canada) Pork a p * = 1/ MPL p * Beans a b * = 1/ MPL b * Production Possiibilities Frontiers: (home) (foreign) L Q a Q a b b p p = + * * * * * L Q a Q a b b p p = +
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5 The Ricardian model United States Canada Q b Q p Slope (MRT) = -a p / a b Slope (MRT) = -a p * / a b * b a L / p a L / * * / b a L * * / p a L Q b Q p
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6 The Ricardian model In autarky, relative prices simply reflect productivity (that is, the marginal product of labor in each sector). For the U.S.: p b b p b p b p MPL MPL a a a w a w P P p = = = = * * * * * * * * * * * p b b p b p b p MPL MPL a a a w a w P P p = = = =
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7 The Ricardian model Autarky Q P Q P * Q B * United States Canada
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8 The Ricardian model Q P Q P * Q B * United States Canada
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9 The Ricardian model Export supply and import demand for pork p p * w b w p P P Canadian import demand US export supply Q pork p w
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10 Numerical example Home (United States) workers per pig a p = 4 workers per bushel of beans a b = 8 total labor force L = 80 Foreign (Canada) workers per pig a p * = 2 workers per bushel of beans a b * = 1 total labor force L = 20
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This note was uploaded on 01/27/2010 for the course ECON 433 taught by Professor Staff during the Spring '08 term at Pennsylvania State University, University Park.

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Econ_433_s10_lec3 - Advanced International Trade Lecture 3...

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