Define the Ricardian model of trade
A country has a comparative advantage in a good, relative to another good and another country, if its relative cost of producing the good is lower than the other country’s.
Comparison should be done in autarky, i.e., when they do not trade, because costs may change as a result of trade
Define Opportunity costs
cost of producing sth. measures the cost of not being able to produce something else because resources have already been used
Define comparative advantage
- country A has lower opportunity cost than country B
- uses its resources more efficiently compared to producing other goods
What are the assumptions made by Ricardo?
Two countries only
Two goods
Constant unit labor requirements and productivity (konstante Skaleneffekte)
Production uses only labor
labor productivity varies across countries but productivity in each country is constant across time
labor mobile between sectors, not mobile between countries
perfect competition
identical preferences
no transport cost
Define the PPF of an economy
What are the implied benefits from trade?
The production possibility frontier (PPF) of an economy shows the maximum amount of a goods that can be produced for a fixed amount of resources. It is the following:
hourly wages of C makers are equal to the market value of C produced in an hour: Wages = Pc / aLC
workers will produce good with higher wages
Benefits from trade:
relative quantities from world production
Workers (domestic & foreign) earn higher wages because the relative price for the good they specialize on increases, while the other good’s relative price decreases with trade
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