Comparative Advantage
Chapter 2 Labor Productivity and Comparative Advantage: The Ricardian Model
Chapter Organization
§ § § § § § § § §
Introduction The Concept of Comparative Advantage A One-Factor Economy Trade in a One-Factor World Misconceptions About Comparative Advantage Comparative Advantage with Many Goods Adding Transport Costs and Nontraded Goods Empirical Evidence on the Ricardian Model Summary
Slide 2- 2
Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy Sixth Edition Policy, by Paul R. Krugman and Maurice Obstfeld
Copyright © 2003 Pearson Education, Inc.
Introduction
§
Countries engage in international trade for two basic reasons:
The Concept of Comparative Advantage
§ §
On Valentine’s Day the U.S. demand for roses is about 10 million roses. Growing roses in the U.S. in the winter is difficult.
• They are different from each other in terms of climate, land, capital, labor, and technology.
• They try to achieve scale economies in production.
§
The Ricardian model is based on technological differences across countries.
• Heated greenhouses should be used. • The costs for energy, capital, and labor are substantial.
• These technological differences are reflected in differences in the productivity of labor.
§
Slide 2- 3
Resources for the production of roses could be used to produce other goods, say computers.
Slide 2- 4
Copyright © 2003 Pearson Education, Inc.
Copyright © 2003 Pearson Education, Inc.
The Concept of Comparative Advantage
§
Opportunity Cost
The Concept of Comparative Advantage
§
The principle of comparative advantage: • If each country exports the goods in which it has comparative advantage (lower opportunity costs), then all countries can in principle gain from trade.
• The opportunity cost of roses in terms of computers is the number of computers that could be produced with the same resources as a given number of roses.
§
Comparative Advantage
• A
Chapter Organization
§ § § § § § § § §
Introduction The Concept of Comparative Advantage A One-Factor Economy Trade in a One-Factor World Misconceptions About Comparative Advantage Comparative Advantage with Many Goods Adding Transport Costs and Nontraded Goods Empirical Evidence on the Ricardian Model Summary
Slide 2- 2
Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy Sixth Edition Policy, by Paul R. Krugman and Maurice Obstfeld
Copyright © 2003 Pearson Education, Inc.
Introduction
§
Countries engage in international trade for two basic reasons:
The Concept of Comparative Advantage
§ §
On Valentine’s Day the U.S. demand for roses is about 10 million roses. Growing roses in the U.S. in the winter is difficult.
• They are different from each other in terms of climate, land, capital, labor, and technology.
• They try to achieve scale economies in production.
§
The Ricardian model is based on technological differences across countries.
• Heated greenhouses should be used. • The costs for energy, capital, and labor are substantial.
• These technological differences are reflected in differences in the productivity of labor.
§
Slide 2- 3
Resources for the production of roses could be used to produce other goods, say computers.
Slide 2- 4
Copyright © 2003 Pearson Education, Inc.
Copyright © 2003 Pearson Education, Inc.
The Concept of Comparative Advantage
§
Opportunity Cost
The Concept of Comparative Advantage
§
The principle of comparative advantage: • If each country exports the goods in which it has comparative advantage (lower opportunity costs), then all countries can in principle gain from trade.
• The opportunity cost of roses in terms of computers is the number of computers that could be produced with the same resources as a given number of roses.
§
Comparative Advantage
• A