03 The Ricardian Model, Part 1

03 The Ricardian Model, Part 1 - The Ricardian Model Part 1...

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1 1 The Ricardian Model, Part 1 • Agenda –In troduc t ion – Opportunity Costs and Comparative Advantage – The Ricardian Autarky Model – Opportunity Cost, Relative Prices, and Wages 2 Introduction There are 2 broad theories to explain the pattern of international trade. 1. Differences in labor, physical capital, natural resources, and technology create productive advantages for countries. 2. Economies of scale, first mover advantage, and imperfect competition can also create productive advantages for countries. 3 Opportunity Cost •Th e opportunity cost of producing something is the value of NOT being able to produce something else with the same resources. 4 Opportunity Cost • Suppose a limited number of workers could be employed to produce either roses or computers. – The opportunity cost of producing computers is the amount of roses not produced with the same resources. – The opportunity cost of producing roses is the
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2 5 Opportunity Cost • An example: – Suppose that in the US, 10 million roses can be produced with the same resources that could produce 100,000 computers. – Suppose that in Ecuador, 10 million roses can be produced with the same resources that could produce 25,000 computers. 6 Opportunity Cost • An example: – The US has a lower opportunity cost in producing computers. • In order to produce 100,000 computers, the US would have to NOT produce 10 million roses. • In order to produce 100,000 computers, Ecuador would have to NOT produce 40 million roses. 7 Opportunity Cost • An example: – Ecuador has a lower opportunity cost in producing roses. • In order to produce 10 million roses, Ecuador would have to NOT produce 25,000 computers. • In order to produce 10 million roses, the US would have to NOT produce 100,000 computers. 8 Opportunity Cost • An example: – If labor is the only resource; • Then workers in US are more productive than workers in the Ecuador in producing computers, • While workers in Ecuador are more productive than workers in the US in producing roses.
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3 9 Comparative Advantage • A country has a
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This note was uploaded on 02/25/2012 for the course ECON 181 taught by Professor Kasa during the Spring '07 term at Berkeley.

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03 The Ricardian Model, Part 1 - The Ricardian Model Part 1...

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