Comparative advantage in many
goods
Radoslav Jakubčo
Dávid Žitňanský
Model
• We have a model with two countries – home (a) and
foreign (a*)
• Just one production factor= labor
• Both countries produce N products (1,...,N)
• Labor – amount of hours (L) to produce one unit (i)
Označenie:
• Home´s unit labor requirement for particular good is aLi
• Foreign´s unit labor requirement for particular good is
a*Li
• Costs of production (i) in home is waLi and in
foreign is wa*Li
• When: waLi < w*a*Li ; a*Li /aLi > w/w*, it
will be produced in home
• On the other hand: waLi > w*a*Li ; a*Li/aLi <
w/w*, it will be produced foreign
Problem
Good
Home unit
labor
aLi
Foreign unit
labor
a*Li
Relative home
production
advantege
a*Li/ aLi
Tanks
2
24
12
Fighter Jets
3
27
9
Helicopters
8
40
5
Cuison vehicles
10
30
3
Submarines
15
12
0,8
Solution(part1)
Asume that wage at home is higher
a) 8 times
b) 5,5 times
w/w*
a) 8 / 1 = 8
b) 5,5 / 1 = 5,5
Which products should be made in home in a) and b)
a*Li/aLi > w/w*
a. 12 > 8 ; 9 > 8
b. 12 > 5,5 ; 9 > 5,5
From the calculation we can see that home will
produce:
Z výpočtu vyplýva, že domáca krajina má
nákladovú výhodu vo výrobe:
a) Tanks and fighter jets
b) Tanks and fighter jets
Which means that all other goods will be
IMPORTED from Foreign
Foreign has better productivity with lower wages for
these goods:
A. Helicopters: costs will be 40/5,5=7,2727 hours
while in home it was 8
B. Cuison Vehicles: costs just 40/5,5=7,2727 while in
home it was 10
C. Submarines: costs will be 12/5,5=2,1818 while in
home it was 15
Determine the relative wage with more goods
• When determing the relative wage in economy with
more goods we need to find out the relative demand for
product and the relative demand for labor
Reasons of decrease in relative demand for labor:
• Home wage is higher than in foreign – home products
are more expensive – demand for them in foreign
decrease
• Higher wage at home – lower production at home –
lower demand for labor
Solution (part 2)
• At home the wage is 5,5 times higher than in foreign – so
it prodeces only tanks fighter jets
• If the wage will be 8,8 times higher – the specialization
of the market will not change
Lower:
 Relative demand for products
 Demand for labor
Imagine the wage in home will rise 9,1 times what will
happen?
-Home will stop producing fighter jets as it will be more
efficient to import them
-Foreign will produce it
 Assume that wage will rise 12,1 times – all goods will be
made by foreign country
Ricardian model of more goods for determination of
relative wage (determined by the intersection of the
dericated relative demand curve for Labor and relative
supply
Relative
Wage rate
w/w*
Relative quantity of labor L/L*
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