Chapter 3: Labor Productivity and comparative advantage: The

Ricardian model
A one-factor Ricardian model:
1. Labor is the only factor of production
2. Labor Productivity varies across county due to differences in tech,
but labor productivity in each country is constant
3. The supply of labor in each country is constant
4. Two goods: wine and cheese.
5. Competition allows workers to be paid a wage equal to the value
of what they produce, and allows them to work in the industry
that pays the highest wage.
6. Two countries: home and foreign.

Alc =1 mean that 1 hour of labor produce one pound of cheese

( home country)
Alw=2 mean that 2 hour of labor produce one gallon of wine
( home country)
 High unit labor requirement means low labor productivity
L( labor supply): total number of hours worked in home country( a
constant number)
Qc: how many pounds of cheese are produced
Qw: how many gallons of wine are produced
aLcQc + aLwQw <= L

Qc=L/aLc when Qw=0

Qw=L/aLw when Qc=0
Example: L=1000h
The production possibilities frontier= aLcQc+ aLwQw<=L
 Qc+2Qw<=1000

Opportunity cost to produce 1 good: aLc/aLw (constant)

Qw= L/aLw – (aLc/aLw)Qc

(1).ALc<aLc* (*)foreign
(2).ALw<aLw*
(1),(2) absolute advantage của cả 2 sản phẩm

Giả sử aLc/aLw < aLc*/aLw* aLw/aLc > aLw*/aLc* (các trị số

lớn hơn 0)  opp. Của W trong nước > … foreign.
 Opportunity cost của sp C trong nước < OC của C foreign
Home bán sp mà nó rẻ hơn so với việc sx ở foreign
Tương tự home mua sản phẩm mà nó rẻ hơn khi sx ở home
TH1:
Pc/Pw < aLc/aLw < aLc*/aLw*
Quy đổi theo wage để KL

Wage Home Foreign

Pc/aLc < Pw/aLw Pc/aLc* < Pw/aLw*
Wage C < wage w wage c*< wage w*
 Home chỉ sx w  foreign chỉ sx w
 Cả 2 nước đều sx 1 sp ( ko xảy ra)

TH2: Pc/Pw =aLc/aLw<aLc*/aLw*

Wc= Ww Wc*<Ww*
 Sx cả 2 sp  chỉ sx W

TH3: aLc/aLw<Pc/Pw< aLc*/aLw*

Pc/aLc >Pw/aLw Pc/aLc*< Pw/aLw*
Wc>Ww Wc*< Ww*
 Chỉ sx C  chỉ sx W
 TH4: aLc/aLw < aLc*/aLw* = Pc/Pw
Pc/aLc > Pw/aLw Pc/aLc*=Pw/aLw*
Wc>Ww Wc*=Ww*
 Chỉ sx C  sx cả 2 sp W và C

TH5: aLc/aLw < aLc*/aLw* < Pc/Pw

Pc/aLc > Pw/aLw Pc/aLc* > Pw/aLw*
 Chỉ sx c  Chỉ sx c
 Cả 2 nước đều chỉ sx C
Relative supply ( Supply của 2 sp cỉa 2 nước)
Rs= (Qc+Qc*)/(Qw+Qc*)
The Ricardian model predicts that countries completely specialize in
production
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