1、TRADE AND TECHNOLOGY: THE RICARDIAN MODEL,1 Reasons for Trade 2 Ricardian Model 3 Determining the Pattern of International Trade 4 Solving for International Prices 5 Conclusions,2, 2008 Worth Publishers International Economics Feenstra/Taylor,Homework,Chapter 2, question 2,3,4,5,7,11, 2008 Worth Pub

2、lishers International Economics Feenstra/Taylor,Introduction,Why does the U.S. import goods that it could easily produce itself with its great manufacturing capability? The first part of this book looks at the various reasons for trade: Technological differences Differences in amounts of resources D

3、ifferences in costs of outsourcing The proximity of countries to each other, 2008 Worth Publishers International Economics Feenstra/Taylor,Reasons for Trade,Table 2.1 U.S. Imports of Snowboards, 2005, 2008 Worth Publishers International Economics Feenstra/Taylor,Reasons for Trade,Proximity (Canada)

4、The closer countries are the lower the costs of transportation. For example, the largest trading partner of most European countries is another European country. Proximity often leads to countries joining into a free trade area., 2008 Worth Publishers International Economics Feenstra/Taylor,Reasons f

5、or Trade,Resources (Canada, Austria ) A country can have resources that give it an edge in the production of certain goods. A country with a lot of snow may be very good at producing snowboards. Geography includes natural resources (including land and minerals), labor resources, and capital. Resourc

6、es are also called factors of productionthe land, labor, and capital used to produce goods and services., 2008 Worth Publishers International Economics Feenstra/Taylor,Reasons for Trade,Resources (Mexico and Taiwan ) Some countries produce unfinished products that are then processed in another count

7、ry. Unfinished snowboards produced in Mexico and Taiwan Trade in unfinished goods is an example of outsourcingwhen production activities are spread across several countries and trade semi-finished products between them., 2008 Worth Publishers International Economics Feenstra/Taylor,Reasons for Trade

8、,Absolute Advantage (Germany) When a country has the best technology for producing a good, it has an absolute advantage in the production of that good. Germany has an absolute advantage in the production of snowboards. Why is it that so many are imported from China then? Or why doesnt the U.S. just

9、make all its own snowboards?, 2008 Worth Publishers International Economics Feenstra/Taylor,Reasons for Trade,Comparative Advantage (China) Absolute advantage is actually not a good explanation for trade patterns. Comparative advantage is the primary explanation for trade among countries. A country

10、has a comparative advantage in producing those goods that it produces best compared with how well it produces other goods. China does not have an absolute advantage compared to U.S. but is better at producing snowboards than some other goods., 2008 Worth Publishers International Economics Feenstra/T

11、aylor,Ricardian Model,To develop a Ricardian model of trade, we will use an example with two goods: wheat and cloth. Wheat and other grains are major exports of the U.S. and Europe. Many types of cloth are imported into these countries. Home will be the country exporting wheat and importing cloth.,

12、2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,The Home Country We will assume that labor is the only resource used to produce both goods. One worker can produce 4 bushels of wheat or 2 yards of cloth. The Marginal Product of Labor is the extra output obtained by using

13、 one more unit of labor. MPLW = 4 and MPLC = 2., 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,Home Production Possibilities Frontier We can use the marginal products of labor to construct Homes PPF. Assume there are 25 workers in Home. If all the workers were employe

14、d in wheat, the country could produce 100 bushels. If they were all employed in cloth they could produce 50 yards. The PPF connects these two points., 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,Showing these calculations we can see: Labor = 25, MPLW = 4, MPLC = 2 Q

15、W = MPLW(L) = 25(4) = 100 QC = MPLC(L) = 25(2) = 50 This gives us a straight line PPF which is a unique feature of the Ricardian model. It assumes the marginal products of labor are constant. There are no diminishing returns because the model ignores the use of other resources., 2008 Worth Publisher

16、s International Economics Feenstra/Taylor,Ricardian Model,Figure 2.1, 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,The slope of the PPF can be calculated as the ratio of marginal products of the two goods. Opportunity cost of wheatthe amount of cloth that must be giv

17、en up to obtain one more unit of wheat or the price of wheat in terms of cloth., 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,Home Indifference Curve Given Homes PPF, how much wheat and cloth will home actually produce. The answer depends on demand. Demand can be rep

18、resented with indifference curve. An indifference curve shows the combinations of two goods that the country can consume and be equally satisfied., 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,All points on an indifference curve have the same level of utility. Points

19、 on higher indifference curves have higher utility. Indifference curves are often used to show the preferences of an individual. But we use indifference curves to show the preferences of an entire country., 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,The country is

20、indifferent between A and B The country is better off on U2 but cannot produce that much U0U1U2,Figure 2.2, 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,Home Equilibrium Without trade, the PPF acts as a budget constraint for the country. With perfectly competitive ma

21、rkets, the country will produce at its highest level of utility within the limits of the PPF. In the graph, the highest level of utility that can be reached and still stay within the PPF is U1 with production at point A., 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,

22、Home Equilibrium Point A is the no-trade equilibrium. (Autarky自給自足 equilibrium) The country can reach point A its own production. The assumption of perfect competition will assure the country ends up at the highest level of utility possible., 2008 Worth Publishers International Economics Feenstra/Ta

23、ylor,Ricardian Model,Opportunity Cost and Prices The slope of the PPF reflects the opportunity of producing one more bushel of wheat. Under perfect competition the opportunity cost of wheat should equal the relative price of wheat. Price reflects the opportunity cost of a good., 2008 Worth Publisher

24、s International Economics Feenstra/Taylor,Ricardian Model,To solve for the prices of wheat and cloth, we review how wages are determined. Wages Determination of wages In competitive markets firms hire workers up to the point at which the hourly wage equals the value of one more hour of production. T

25、he value of one more hour of labor equals the amount of goods produced in that hour (MPL) times the price of the good. Labor hired up to the point where wage equals P*MPL for each industry., 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,Wages In competitive markets, l

26、abor can move freely between industries. Labor will move to the higher paid industry. This will continue until there is equalization of wages between industries., 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,The equalization of wages will give us the following: The r

27、ight hand side is the slope of the PPF and the opportunity cost of obtaining one more bushel of wheat. The left hand side is the relative price of wheat., 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,The price ratio, PW/PC, always denotes the relative price of the go

28、od in the numerator（分子 ）, measured in terms of how much of the good in the denominator must be given up. The slope of the PPF equals the relative price of wheat, the good on the horizontal axis.（水平線）, 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,The Foreign Country A

29、ssume Foreigns technology is inferior to Homes. Foreign has an absolute disadvantage in producing both wheat and cloth as compared to Home., 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,The Foreign Country Foreign Production Possibilities Frontier Assume a Foreign wo

30、rker can produce one bushel of wheat or one yard of cloth. MPL*W = 1, MPL*C = 1 Assume there are 100 workers available in Foreign. If all workers were employed in wheat they could produce 100 bushels. If all workers were employed in cloth they could produce 100 yards., 2008 Worth Publishers Internat

31、ional Economics Feenstra/Taylor,Ricardian Model,Figure 2.3, 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,Opportunity Costs for Goods in Home and Foreign, 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,Comparative Advantage A country has

32、 a comparative advantage in a good when it has a lower opportunity cost of producing than another country. By looking at the chart we can see that Foreign has a comparative advantage in producing cloth. Foreigns Opportunity cost of cloth is lower. Home has a comparative advantage in producing wheat.

33、 Homes opportunity cost of wheat is lower., 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian ModelForeign,Figure 2.4, 2008 Worth Publishers International Economics Feenstra/Taylor,Ricardian Model,Equilibrium in Foreign Foreigns preferences can also be represented by an indiffe

34、rence curve. Its economy produces at the point of highest utility for the country within the PPF constraint. The slope of the PPF is the opportunity cost of wheat. The no-trade relative price of wheat is P*W/P*C = 1. The relative price exceeds Homes no-trade relative price of wheat: P*W/P*C = . The

35、difference in relative prices comes from the comparative advantage that Home has in wheat., 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,What happens now when goods are traded between Home and Foreign? We will see the countrys no-trade

36、relative price determines which product it will export and which it will import. The no-trade relative price equals its opportunity cost of production. Therefore, the pattern of exports and imports will be determined by the opportunity costs of production in each countrytheir comparative advantage.,

37、 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,International Trade Equilibrium Relative price of cloth in Foreign is PC/PW = 1. Relative price of cloth in Home is PC/PW = 2. Therefore Foreign would want to export their cloth to Homethey

38、can make it for $1 and export it for more than $1. The opposite is true for wheat. Home will export wheat and Foreign will export cloth. Both countries export the good for which they have the comparative advantage., 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Patter

39、n of International Trade,How Trade Occurs As Home exports wheat, quantity of wheat sold at Home falls. The price of wheat at Home is bid up. More wheat goes into Foreigns market. The price of wheat in Foreign falls. As Foreign exports cloth, the quantity sold in Foreign falls, and the price in Forei

40、gn for cloth rises. The price of cloth at Home falls., 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,International Trade Equilibrium Two countries are in a trade equilibrium when: the relative price of each good is the same in the two co

41、untries the amount of each good that the countries want to trade is equal In understanding the trade equilibrium we need to do two things: Determine the relative price of wheat or cloth in the trade equilibrium. See how the shift from the no-trade equilibrium to the trade equilibrium affects product

42、ion and consumption in both Home and Foreign., 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,International Trade Equilibrium The relative price of wheat in the trade equilibrium will be between the no-trade price in the two countries. Fo

43、r now we will assume the free-trade price of PC/PW is 2/3. This is between the price of in Home and 1 in Foreign. We can now take this price and see how trade changes production and consumption in each country., 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of

44、 International Trade,Change in Production and Consumption Home producers of wheat can earn more than the opportunity cost of wheat by selling it to Foreign. Home will therefore shift labor resources toward the production of wheat and increase its production. Remember wages are calculated by the pric

45、e of the good times its marginal product. Given the information from before, we can calculate the ratio of wages in the two industries., 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,Homes workers will want to work in wheat and no cloth

46、will be produced. With trade, Home will be fully specialized in wheat production., 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,International Trade Home can export wheat at the international relative price of 2/3. For each bushel of whe

47、at it exports, it gets 2/3 yards of cloth in return. In figure 2.5 we trace this out to get a new price line showing the world price. The world price line shows the range of consumption possibilities that a country can achieve by specializing in one good and trading. Remember: this is only a consump

48、tion possibility because production is still constrained by the PPF., 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,The new world price, PW/PC = 2/3, shows us the new range of consumption possibilities,The country can now achieve a highe

49、r utility with the new consumption possibilities, 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,A,B,25,C,40,Home produces 100 bushels but consumes only 40, so exports equal 60,50,Home produces 0 yards of cloth but consumes 40, so imports

50、 equal 40.,40, 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,International Trade Trade allows a country to engage in consumption possibilities it did not have before trade. We can see this as Home can now be on a higher indifference curv

51、e with trade than they were without it. This is the first demonstration of gains from trade., 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,Pattern of Trade and Gains from Trade From figure 2.5, we can also see that Homes exports and imp

52、orts are equal when valued in the same units. Home exports 60 bushels of wheat; multiplying this by the price of wheat in terms of cloth, 2/3, gives 40. This equals the amount of cloth that is imported. Now consider Foreign. Conditions there are shown in figure 2-6., 2008 Worth Publishers Internatio

53、nal Economics Feenstra/Taylor,Determining the Pattern of International Trade,Figure 2.6, 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,Pattern of Trade and Gains from Trade Each country is exporting the good for which it has the comparat

54、ive advantage. This confirms that the pattern of trade is determined by comparative advantage. This is the first lesson of the Ricardian model. There are gains from trade for both countries. This is the second lesson of the Ricardian model., 2008 Worth Publishers International Economics Feenstra/Tay

55、lor,Determining the Pattern of International Trade,Pattern of Trade and Gains from Trade However, we have not yet determined the level of wages across countries. Relative prices converge. Do wages? Wages do rise in each country, but they do not converge. They are determined by absolute advantage, no

56、t comparative advantage., 2008 Worth Publishers International Economics Feenstra/Taylor,Comparative Advantage in Apparel, Textiles, and Wheat, 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,Solving for Wages Across Countries As stated bef

57、ore, in competitive labor markets, firms will pay workers the value of their marginal product. Since Home produces and exports wheat, they will be paid in terms of that good the real wage is MPLW = 4 bushels of wheat. The workers sell the wheat on the world market at a relative price of PW/PC = 2/3.

58、 We can use this to calculate the real wage in terms of cloth: (PW/PC)MPLW = (2/3)4 = 8/3 yards., 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,Solving for Wages Across Countries We can do this for Foreign as well and summarize: Home rea

59、l wage is 4 bushels of wheat 8/3 yards of cloth Foreign real wage is 3/2 bushels of wheat 1 yard of cloth Foreign workers earn less than Home workers as measured by their ability to purchase either good. This fact reflects Homes absolute advantage in the production of both goods., 2008 Worth Publishers International Economics Feenstra/Taylor,Determining the Pattern of International Trade,Wages are determined by absolute advantage and trade is determined by comparative advantage. This should make sense. The only way a country with poor technology can export at a price other