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Assignment #_3_ Student-ID: I6217232

South Korea has experienced a sharply economic growth due principally to an increase of its
international trade. The purpose of this assignment is to explain GDP growth based on
technological differences between South Korea and US, and why a trade can have a
significant impact on an economy using the Ricardian model.

Firstly, technology plays an important role in the economic growth of a country. Indeed, with
the same quantity of inputs, it allows the country to produce more outputs, to create better
quality products or to reduce production time. Therefore, it brings a considerable advantage
because it can boost the country’s production efficiency. United States benefit from a higher
level of technology and high skilled workers compared to South Korea, which possesses low
skilled workers. This major difference has led Korea to emulate US in order to become better
in technology, which has inevitably contributed to its economic growth.

Secondly, on the one hand, US have an absolute advantage in the production of both goods
because it uses resources more productively than South Korea. On the other hand, US has a
comparative advantage in producing good A and South Korea in good B because US has a
lower relative price in good A than in good B, in the same vein that South Korea hold a lower
relative price in good B than in good A. So, even if US has an absolute advantage in both
goods, Korea can still maintain its comparative advantage because it has a lower opportunity
cost in good B. In this case, South Korea and US should specialize in the good that has a
smaller relative price than the world relative price and therefore, must export the latter.
Hence, it demonstrates that the international trade is defined by comparative advantage.

Thirdly, the figure below describes the production possibility frontier model (PPF). Its slope
is equal to the relative price of good. As explained above, South Korea will export good B
and import good A while US export good A and import good B. To explain it more precisely,
the trade will diminish the relative price of good A in South Korea which will lead to a
decrease in wages as a result of the lower demand for good A. Workers will consequently,
move to the industry of good B because they will receive a higher income than in good A’s
industry. Naturally, South Korea will specialize in good B. The same process will occur for
US, which will see its relative price of good B fall. Before trade, the country's consumption
and production are equal but after trade, due to the specialization of the country in the
production of a single good, the country's production for the good will be higher than its
consumption. In exchange for importing the good that is no longer produced in the country,
the country will export the unconsumed production. The trade is finally a gain for both
countries because it reduces production costs, it increases efficiency, it rises the income for
workers and it reaches a higher level of consumption, hence achieved higher utility curve. It
may be inferred that welfare for both countries will increase, and population will benefit from
a higher standard of living.
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Finally, due to the higher technological level achieved by South Korea through backward
engineering, SK and US have no longer differences in their relative price. Thus, there is no
more gains from trading.

References:

Feenstra, R.C. & Taylor, A.M. (2011), International Economics, 2nd edition W.H. Freeman &
Co

Connolly , M. & Yi, K.M, (September, 2018), How Much of South Korea’s Growth Miracle
Can Be Explained by Trade Policy?, Duke University & Federal Reserve Bank of
Philadelphia

https://www.frbsf.org/economic-research/files/wp08-23bk.pdf

Costinot, A. & Komunjer, I., (November, 2008), What Goods Do Countries Trade? A
Structural Ricardian Model, Massachusetts Institute of Technology & University of
California at San Diego

https://economics.mit.edu/files/3487

Deardorff, A.V, (June, 2007), The Ricardian Model, University of Michigan

https://core.ac.uk/download/pdf/7053674.pdf
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