∗

"#! !! "#!
< < ∗ à each specialize
"#" !" "#"

Relative Wages

0 ∗
&$! &∗
à lies between relative productivity in each country (between & $" )
0∗ &%! &$"

Ex. Cheese Wine

H: 𝑎#$ = 1 𝑎#% = 2 𝑃$ = 12 𝑃% = 12
∗ ∗
f: 𝑎#$ =6 𝑎#% =3

!! () !" () , ()
𝑊 = = = 12 𝑊∗ = ∗ = =4 = =3
&$! ( &$" + ,∗ -

∗ ∗
&$! . &$" +
&$!
= ( =6 &
&$"
= ) = 1.5 1.5 < 3 < 6

Home is 6 times as productive in cheese and 1.5 times in wine.

Cost Advantage:
• High wages are offset by high productivity
• Low productivity is offset by low wages

H: cost of 1 unit of cheese: 1 X 12 = 12

F: cost of 1 unit of cheese: 6 X 4 = 24

H: cost of 1 unit of wine: 2 X 12 = 24

F: cost of 1 unit of wine: 3 X 4 = 12

Do wages reflect productivity?

Actual country data
Ricardian model with many goods

(i = 1, 2, …, N)

, &∗
If < &$' , home will produce i => cost advantage
,∗ $'

Ex. aLi aLi*

∗
, &!"
1 1 9 Assume =4 &!"
,∗
2 5 40 9
3 3 15 who produce what? H 8
4 6 12 5
5 12 9 F 2
.75

è Fixed and determined by population of H & F

Ricardian Model à completely specialized à not usually true

è More than one factory of production reduces the
tendency of specialization
è Transaction costs (decrease or prevent trade)

Non-traded goods & services à haircut!