Inequality gap widens as ‘world’s richest

1% get 82% of the wealth,’ Oxfam says

•  Approximately 82 percent of the money generated last year
went to the richest 1 percent of the global population, while the
poorest half saw no increase at all

•  Last year, Oxfam said billionaires would have seen an uptick of

$762 billion — enough to end extreme poverty seven times over

www.CNBC.com
 REAL WAGES OF US AND MEXICO

Before Trade
High-Tech Low-Tech
Good/hour Good/hour
US 1 1
Mexico 1/8 1/2

After Trade

High-Tech Low-Tech
Good/hour Good/hour
US 1 2
Mexico 1/4 1/2
 3. Formal Analysis of Comparative Advantage

3.1 Assumptions:
a)  Perfect competition in both commodity and factor markets
- costs of production determine pre-trade prices, and flexibility
of factor prices ensures that factors are fully employed
b) Fixed quantities of factors of production
c) Factors of production are perfectly mobile between industries
within each country but completely immobile between countries
d) Unchanging level of technology
e) Zero transport costs and other barriers to trade
f) Given tastes and preferences

g) Balanced trade: value of imports equals value of exports

 3.2 Concepts
•  Opportunity cost of x : amount of y that must be given up
in order to obtain x.

•  Production possibility frontier (PPF)

•  marginal rate of transformation (MRT)

y y

x x
constant opportunity cost increasing opportunity cost
 •  Indifference curve

y
-Δy MUy = Δx MUx

•a Δy MU x
=
•b Δx MU y

x
•  Social indifference curve?
a) If individuals have different preferences, then the total
quantity demanded of a good will depend upon the distribution
of income.
•  change in income distribution will change the shape of SIC
b) Even if individuals have the same tastes and spend their
incomes in the same proportions on goods, a change in income
distribution will result in winners and losers.
•  Since interpersonal comparison of utilities is not possible
because they can only be ordinally measured, it is not
possible to judge whether society as a whole is better off
or worse off.

•  SIC exists under the ff. extreme assumptions: every

individual has exactly the same tastes and owns exactly the
same amount of each factor of production.
3.3 Pattern of Trade

Let aLx and aLy be the unit labor requirements (in days) of the
home country.
a Lx X + a Ly Y ≤ L
y

Opportunity cost of x: a Lx = slope of PPF

L/aLy
a Ly

x
L/aLx
In a closed economy, both x and y must be produced.

Px d = aLx wx Py d = aLy wy

Given labor mobility,

Px d
Py d
wx = w y =
a Lx a Ly

a Lx Px d
= d
a Ly P y

Let aLx* and aLy* are unit labor requirements (in days) of foreign
country.
L* is foreign country’s labor force.