THEME 3

LABOUR PRODUCTIVITY AND COMPARATIVE

ADVANTAGE: THE RICARDIAN MODEL

•The concept of comparative advantage

•A one factor economy

 Production possibilities

Home wine
production, QW
in gallons Graph 3.1
Home’s Production Possibility Frontier

Absolute value of slope

equals opportunity costs of
cheese in terms of wine

L/aLW P

L/aLC
Home cheese
production, Qc
in pounds
 Relative prices and supply

•Trade in a one-factor world

Determining the relative price after trade…

Foreign wine
production, Q*W
in gallons Graph 3.2
Foreign’s Production Possibility Frontier

L* /a*LW F*

P*

L*/a*LC Foreign
cheese
production, Qc
in pounds
 Graph 3.3
Relative price of World Relative Supply and Demand
cheese, Pc/PW

a*LC / a*LW RS

RD
aLC / aLW 2

RD’

Q’ L*/a*LC
Relative quantity
L*/a*LC of cheese, Q + Q*
c c

Qw+ Q*w
 Graph 3.4
Trade expands consumption possibilities

Quantity Quantity
of wine, of wine,
QW Q *W

T F*

F P* T*

Quantity Quantity
of of
cheese, cheese,
Qc Q*c

(a) Home (b) Foreign

•Comparative advantage with many goods:

Graph 3.5
Relative wage Determination of relative wages
rate, w/w*
RS

10

0,75 RD

Relative
quantity of
labor, L/L*