Notes Jan20 - Suppose to start that each country is...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
EC340 Sec. 3 Professor Matusz 1/20/11 What is “underneath” the PPF to make it look the way it does? Ricardian Model of Trade [Named for David Ricardo] Assumptions: - For each economy, labor is the only factor of production. - Within each country, all labor is equal. - Workers cannot move between countries. - Workers within a country can produce any good. - Assume constant returns to scale. Ex. 1 Home Foreign T-Shirts 4 2 Socks 12 20 Total Labor Supply 50 25 Home has an absolute advantage in producing t-shirts and foreign has an absolute disadvantage. Foreign has an absolute advantage in producing socks and home has an absolute disadvantage. Ex. 2 Home Foreign T-Shirts 4 1 Socks 12 10 Total Labor Supply 50 50
Background image of page 1

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

View Full DocumentRight Arrow Icon
Home has a comparative advantage in producing t-shirts and foreign has a comparative advantage in producing socks. Mutually beneficial trade can occur if each country produces a little more of the good in which it has a comparative advantage, exports that good, and imports the other good.
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Suppose to start that each country is producing a little of each good. I can assign labor within each country so total world supply of each good increases. Ex. 3 Home Foreign World Change in T-Shirts +2-1 +1 Change in Socks-6 +10 +4 Change in Labor L from S to T 1 L from T to S Comparative Advantage : The country with the lower opportunity cost of producing a good is said to have a comparative advantage in producing that good. The opportunity cost of the good on the x-axis is the slope of the PPF. The opportunity cost of the good on the y-axis is the inverse of the slope of the PPF. Another way of thinking about comparative advantage: Home has a comparative advantage in t-shirts if in autarky (Pt/Ps) H < (Pt/Ps) F . Allowing trade automatically generates forces that lead each country to re-allocate resources to produce more of the good for which it has a comparative advantage....
View Full Document

Page1 / 2

Notes Jan20 - Suppose to start that each country is...

This preview shows document pages 1 - 2. Sign up to view the full document.

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