Wk2_corrected_25Aug_Ch_3

Wk2_corrected_25Aug_Ch_3 - Week 2 (Thursday, 8/25/2011)...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Week 2 (Thursday, 8/25/2011) Week 3 (Tuesday, 8/30/2011) Chapter 3 Development of Ricardo Model Focus on Supply Side differences that arise from differences in production technologies across countries
Background image of page 1

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

View Full DocumentRight Arrow Icon
Adam Smith: First to Focus on Technology Differences Adam Smith and Absolute Productivity Countries will export whatever they are “best at producing” Wherever labor productivity is highest Absolute productivity advantage should translate into lower price
Background image of page 2
Two Measures of Productivity Units of output per one hour of Labor We write: A c = .25 C per hr This means one hour of labor produces 1/4 th of a cloth Hours of labor per unit of output We write: a c = 4 hrs per 1 C This means that it takes 4 hours to produce one unit of cloth
Background image of page 3

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

View Full DocumentRight Arrow Icon
Price of A Product ω is the wage rate Price of Cloth P c = (wage) (labor productivity) = ω a c = $10 (4 hrs per 1 C) = $40 per 1 Cloth
Background image of page 4
Improved Productivity: a c New Price of Cloth P c = (wage) (labor productivity) = ω a c = $10 (3 hrs per 1 C) = $30 per 1 Cloth
Background image of page 5

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

View Full DocumentRight Arrow Icon
Smith & Absolute Productivity Two economies: U.S. & RoW Two goods: cloth (C) & wheat (W) One resource: labor (L) Same amount in each nation. Different t echnology: U.S. absolutely better in Wheat
Background image of page 6
Smith & Absolute Productivity U.S. RoW a i a i * 4 hrs per 1 C 1.0 hr per 1 C 2 hrs per 1 W 2.5 hrs per 1 W
Background image of page 7

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

View Full DocumentRight Arrow Icon
Smith & Absolute Productivity Smith’s Prediction: U.S. Lower Price in W produce and export W RoW Lower Price in C produce and export C
Background image of page 8
INTRODUCE MONEY FOR THE MOMENT ω = $3, ω*= €1, and E $/€ = 1 $/€ U.S. P i = ω a i RoW E $/€ P i * = E $/€ ω* a i * P c = $3 (4 hr/C ) = $12 E $/€ P c * = (1 $/€ )(€1)(1 hr/C ) = $1 P w = $3 (2 hr/W )= $6 E $/€ P w * = (1 $/€ )(€1)(2.5 hr/W ) = $2.5
Background image of page 9

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

View Full DocumentRight Arrow Icon
Not Sustainable in Long Run U.S. exports nothing, imports everything and as a result, it runs a trade deficit.
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 56

Wk2_corrected_25Aug_Ch_3 - Week 2 (Thursday, 8/25/2011)...

This preview shows document pages 1 - 11. Sign up to view the full document.

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