Ricardian Model – part 1, Exercises of Technology

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Lecture 2a:

Ricardian Model – part 1

Thibault FALLY

C181 – International Trade

Spring 2018

In this chapter we will examine the following topics:

• Brief summary of reasons to trade and specialize
• Brief history of Ricardian model
• Ricardian model

Reasons countries trade with each other include: ■ Differences in the technology used in each country ■ Differences in the total amount of resources (including labor, capital, and land) ■ Differences in tastes ■ Imperfect competition, product differentiation

1 Reasons for Trade

Reasons countries trade more with some countries than others include: ■ Proximity of countries to each other ■ Low communication/coordination costs ■ Low bilateral tariffs and FTA, etc.

1 Reasons for Trade

• Comparative Advantage A country has a comparative advantage in producing those goods that it produces best compared with how well it produces other goods. When a country has the best technology for producing a good. Technology? Two aspects:
• Absolute advantage

1 Reasons for Trade

Comparative Advantage While Napa has a comparative advantage in growing regular grapes, Canada now has a comparative advantage in making “ice wine” May depend both on technics and resources

1 Reasons for Trade

Mercantilism:

• exporting is “good”: generates gold and silver for the national treasury
• Importing is “bad” because it drained gold and silver  Mercantilists were in favor of high tariffs to obtain low imports and high exports.  This theory does not account for general-equilibrium effects Instead, Ricardo shows that countries can benefit from balanced international trade without having tariffs. David Ricardo (1772-1823) and Mercantilism

(see article posted in the “further readings” folder)

• Old model, but still highly relevant today! (actually more than Krugman’s model!)
• Most “simple” model to illustrate effect of trade (simple yet subtle and not obvious) [PS: Paul Krugman was an economist specialized in Trade (Nobel in 2008) before becoming a New York Times columnist] P. Krugman: why teach Ricardo?

2 Ricardian Model Setup

Two goods:

• Wheat (a major exports of the U.S. and Europe)
• Cloth (major import) For now:
• No land, no capital
• Both goods are produced with labor alone. Notes: See chapter 3 & 4 for model with Capital and Land

We also assume perfect competition And perfect labor markets:

• Labor is mobile across sectors
• But immobile across countries (no migration) Notes: See chapter 3 for imperfect mobility across sectors, See chapters 6 and 9 for imperfect competition.

2 Ricardian Model Setup

The Home Country Home Production Possibilities Frontier

How does the PPF look like in this case?

L= 25 ; MPL

W

= 4 ; MPL

C

2 Ricardian Model Setup

To your iclickers!!

Chanel “BB”

(hold power button for 3 seconds to setup)

A)

C)

D)

In general , how a PPF B)

can never looks like?

E) All these PPF could exist, in theory

Answers: