# 01-International-Economics-Ricardo-students

```International Economics
M1 EI; M1 EA
University Lille 1
Claire Naiditch
[email protected]
o  The concept of comparative advantage
n  Opportunity costs
o  A one-factor Ricardian model
n  Production possibilities
o
o
o
o
o
Empirical evidence
Learning goals
o  After reading this chapter, you should be
able to:
n  Explain how the Ricardian model, the most
basic model of international trade, works and
how it illustrates the principle of
n  Demonstrate gains from trade and refute
n  Describe the empirical evidence
o  that wages reflect productivity and
o  that trade patterns reflect relative productivity.
Fig A.1.: Home’s Production Possibility Frontier
A one-factor Ricardian model
Relative Prices, Wages, and Supply
o  Summary
QC = 0
QC
QC = L/aLC
PC /PW
aLC /aLW
QW = L/aLW
QW
QW = 0
Fig A.2.: Foreign’s Production Possibility Frontier
A one-factor Ricardian model
Relative supply and relative demand
o  Summary
QC
Q*C = 0
QC = 0
Q*C = 0
QC = L/aLC
Q*C
QC = L/aLC
Q*C = 0
aLC /aLW
QW = L/aLW
Q*W = L*/a*LW
QC = L/aLC
Q*C = L*/a*LC
a*LC /a*LW
QW = 0
Q*W = L*/a*LW
QW
Q*W = L*/a*LW
QW = 0
Q*W
QW = 0
Q*W = 0
PC /PW
Fig A.3.: World Relative Supply and Demand
Fig A.4.: Trade Expands Consumption Possibilities
A one-factor Ricardian model
A Numerical Example
Unit Labor Requirements
for Home and Foreign countries
Cheese
Wine
Home
aLC = 1 hour/lb
aLW = 2 hours/gallon
Foreign
a*LC = 6 hours/lb
a*LW = 3 hours/gallon
o  What is the home country’s opportunity cost
of producing cheese?
n  aLC /aLW = 1⁄2
n  To produce one pound of cheese, stop producing
1⁄2 gallon of wine.
Fig A.5.: Productivity and Wage
Many Goods
Home and Foreign Unit Labor Requirements
Good
Home Unit
Labor
Requirement aLi
Foreign Unit
Labor
Requirement
a*Li
Relative Home
Productivity
a*Li/aLi
Apples
1
10
10
Bananas
5
40
8
Caviar
3
12
4
Dates
6
12
2
12
9
0.75
Fig A.6.: Productivity and Wage
Fig A.7.: Productivity and Exports
Empirical Evidence
worker as % of China
% of China
All industries
28.5
1.0
Apparel
77
15.5
challenge of growth,” 2012; UN Monthly Bulletin of Statistics.
Sources of comparative
n
n
n
The quantity and quality of factors of production available
o
o
Ex: good quality farmland, oil and gas, fossil fuels
Climate and geography
o
Ex: abundant low-cost labor suitable for volume production of
manufacturing products
Different proportions of factors of production (HOS)
Increasing returns to scale and the division of labor (New trade
models)
o
o
o
n
Increasing returns occur when output grows more than proportionate
to inputs.
Rising demand in the markets where trade takes place helps to
encourage specialization, higher productivity and internal and external
economies of scale.
These long-run scale economies give regions and countries a significant
Technology
o
o
Investment in research & development
which can drive innovation and invention
Sources of comparative
o
n
Fluctuations in the exchange rate,
o
n
Import controls such as tariffs, export subsidies and quotas
o
n
o
covering factors such as the standard of product design and innovation, product
reliability, quality of after-sales support.
Many countries are now building comparative advantage in high-knowledge
industries and specializing in specific knowledge sectors – an example here is the
division of knowledge in the medical industry, some countries specialize in heart
surgery, others in pharmaceuticals.
Formal institutions
o
o
o
o
n
n
These can be used to create an artificial comparative advantage for a country's
domestic producers
The non-price competitiveness of producers
o
n
which then affect the relative prices of exports and imports and cause changes in
demand from domestic and overseas customers
Political institutions and the stability of democracy (influence capital flows)
Contract enforcement
Financial development
Labor market
Informal institutions
…
Summary
1.  Differences in the productivity of labor
across countries generate comparative
n  Institutions may affect these differences
2.  A country has a comparative advantage
in producing a good when its
opportunity cost of producing that good
is lower than in other countries.
Summary
3.  Countries export goods in which they
have a comparative advantage - high
productivity or low wages give
4.  With trade, the relative price settles in
between what the relative prices were