0321316762_IM_03 - Chapter 3 Labor Productivity and...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 3 Labor Productivity and Comparative Advantage: The Ricardian Model T Chapter Organization The Concept of Comparative Advantage A One-Factor Economy Production Possibilities Relative Prices and Supply Trade in a One-Factor World Box: Comparative Advantage in Practice: The Case of Babe Ruth Determining the Relative Price After Trade The Gains from Trade A Numerical Example Box: The Losses from Non-Trade Relative Wages Misconceptions About Comparative Advantage Productivity and Competitiveness The Pauper Labor Argument Exploitation Box: Do Wages Reflect Productivity? Comparative Advantage with Many Goods Setting Up the Model Relative Wages and Specialization Determining the Relative Wage with a Multigood Model Adding Transport Costs and Non-Traded Goods Empirical Evidence on the Ricardian Model Summary
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
10 Krugman/Obstfeld • International Economics: Theory and Policy, Seventh Edition T Chapter Overview The Ricardian model provides an introduction to international trade theory. This most basic model of trade involves two countries, two goods, and one factor of production, labor. Differences in relative labor productivity across countries give rise to international trade. This Ricardian model, simple as it is, generates important insights concerning comparative advantage and the gains from trade. These insights are necessary foundations for the more complex models presented in later chapters. The text exposition begins with the examination of the production possibility frontier and the relative prices of goods for one country. The production possibility frontier is linear because of the assumption of constant returns to scale for labor, the sole factor of production. The opportunity cost of one good in terms of the other equals the price ratio since prices equal costs, costs equal unit labor requirements times wages, and wages are equal in each industry. After defining these concepts for a single country, a second country is introduced which has different relative unit labor requirements. General equilibrium relative supply and demand curves are developed. This analysis demonstrates that at least one country will specialize in production. The gains from trade are then demonstrated with a graph and a numerical example. The intuition of indirect production, that is “producing” a good by producing the good for which a country enjoys a comparative advantage and then trading for the other good, is an appealing concept to emphasize when presenting the gains from trade argument. Students are able to apply the Ricardian theory of comparative advantage to analyze three misconceptions about the advantages of free trade. Each of the three “myths” represents a common
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/18/2010 for the course ECON 203 taught by Professor Kim during the Spring '10 term at Korea University.

Page1 / 4

0321316762_IM_03 - Chapter 3 Labor Productivity and...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online