lecture notes_Chapter 3_2 - The Ricardian Model Ch.3 Part 2...

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The Ricardian Model Ch.3 – Part 2
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Agenda 1. Comparative advantage 2. World Relative price 3. Relative demand and supply
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Comparative advantage A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of the other good is lower. If a lc / a lw < a lc* / a lw* , Home country is said to have a Comparative Advantage in producing cheese.
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Cont. Q: Can one country have absolute advantage in both goods? Can one country have comparative advantage in both goods? Note that the size of labor force is irrelevant, only the relative productivity matters.
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Relative price a) Before trade: Assume Home has comparative advantage in cheese Home P c /P w = a lc / a lw = 6/8 Foreign P c */P w * = a lc * / a lw * = 12/10 P c /P w < P c */P w *
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3-6 Trade in the Ricardian Model (cont.) Before any trade occurs, the relative price of cheese to wine reflects the opportunity cost of cheese in terms of wine in each country. In the absence of any trade, the relative price of
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This note was uploaded on 02/02/2012 for the course ECONOMICS 239 taught by Professor Wu during the Winter '11 term at Wilfred Laurier University .

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lecture notes_Chapter 3_2 - The Ricardian Model Ch.3 Part 2...

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