Lecture 2: One-factor

economy: The Ricardian

model
1 ntuyen@hcmiu.edu.vn

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 2 Content
1. Comparative advantages
2. One-factor economy: Ricardian model
3. Trade in a one-factor world
4. Misconceptions about comparative advantage.
5. Comparative advantages with many goods

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 3 1. Comparative advantages
• Why trade?
Si knac nhou v tainguyen
• Differences in resources (e.g., natural resources, technology, labor, climate…)
Qui m Kinh te
• Economies of scale

10 millions 100,000 10 millions 30,000

sanpham cap tainguyen de sin xuat mit san pham Khas

• Opportunity cost: dann d mot sung

trade-off of one product given resource to produce another.

• EX: USA’s Opportunity cost of rose in term of computer is…… 1/100

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 L the so sanh
1. Comparative advantages
4

• Trade between two countries can benefit both countries if each country exports the
goods in which it has a………….. comparative advantage.

Comparative
lower ….
advantage
opportunity cost

Comparative advantages
<=)
Lower opportunity cost

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 5 1. Comparative advantages
• However, in the real world, international
can
production and trade are determined in the
lat cung
rule. > peoplesavior
quy va

marketplace, where the supply and demand dienra this

-

Decanh gia Lieu Thing mai giva US va Columbia co Thi su

→ To assess if trade between US and Columbia actually happens like the statement
Tryen bv Khanang so li sank hay Khong
the so

about comparative advantage possibilities, we’ll look at Ricardian Model (1817).

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 6 2. One-factor economy
RICARDIAN MODEL OF TRADE
Nhan mank cong nghe giv cas qu gia the hin qua su' Khac biet vnang suat las dong
• Emphasizes differences in technology across countries, reflected in differences in
the productivity of labor.
• Assume that we are dealing with an economy (which we call Home). In this
economy: labor
Lao dong la ye to san xut duy what cost for salang
• Labor is the only factor of production (one-factor economy). >
- -wages ,

Chico 2 loai hang ha

d Sain xut
• Only two goods (say wine and cheese) are produced.
Ngun ang las dong la co dinh om quo gia
• The supply of labor is fixed in each country.
Nang suat lao dong ca mo hang ha la co dinh
• The productivity of labor in each good is fixed.
the trong tat ca cas th!
Canh tranh chiem in tring demand
• Perfect competition prevails in all markets.
T2 supplier
-
&
monopoly market &
onlygopol I a
CompareTitle market Perfecttion) Perfectman
( 1 supplier)
,

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 2. One-factor
Khanang xut
san
economy
ca quo gia
·

7 Gio han
Country Production Possibilities Frontier Ex Acc
= &

produc traches chesse

product
:

her can a
=> 2
can
= productivity ATC.
=

=> I house

The technology of Home’s economy

nang st
can be
Tung nganh
dong law trong
summarized by labor productivity in each industry,
du Thehien diei dang don vilao dong can thiet
ALW expressed in terms of the unit labor requirement, the
number of hours of labor required to produce a pound
of cheese or a gallon of wine
requirement of Wine and Cheese
and unit labor
aw a :

C dao ca don vi. lao dong yucau)

inverse of unit requirement (nghich
Productivity
:

of W and ( produced in 1 hour

.

/a , and 1/a: #units

ALC

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 2. One-factor economy
8
Country Production Possibilities Frontier

constant
L: total labor resourc

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f
*
*
L A Q al
+
QC
2. One-factor economy =

9 *
Country Production Possibilities Frontier On = (L-a
&law
which summariz the country's PPF
•
PPF : (w +

LE ,L
* &

-auto -
acco

is
artate
QC
·

Cy = 3-

+ ax - goup

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 10
2. One-factor economy
Country Production Possibilities Frontier

• Slope?

Qu = -L *

gia tri tuyet do ca hi sogaia

absoluate value of slope
= of PPF Line
Auging PPF

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 11
EXAMPLE
• The economy’s total labor supply is 1,000 hours. It takes 1 hour of labor to produce a pound of
cheese and 2 hours of labor to produce a gallon of wine. Then the total labor used in production
is:
1 * pounds of cheese produced + 2 * gallons of wine produced ≤ 1000

• Questions:
• What is the opportunity cost of wine in terms of cheese?
• If we need 500 pounds of cheese and 200 gallons of wine, how many labor supply do we need?
• Can 400 pounds of cheese and 400 gallons of wine be produced at the same time?
• If the economy devoted all its labor to cheese production, how many pounds of cheese are
produced?
• If the economy devoted all its labor to wine production, how many gallons of wine are
produced?

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We have ac =

LWI
 2. One-factor economy
12
Relative prices and supply
cacaca nhan chain to da hol the
Trong motnen kinh te cann trank ,
ca quyet dink ca chu ang ving duo auyet dink boi no hia
• In a cacompetitive economy, supply decisions are determined by the attempts of individuals
nhap ho dong la yet sain Xuat duy what nen vie
Vilao
to maximize their earnings. In our simplified economy,dinh since labor
boi ?
is the only factor
chuyer lao sing sang bat
of
di quiet se knuw su di Ki

production, the supply of cheese and wine will be determined by the movement of labor
nao tra living hoi
cao .

to whichever sector pays the higher wage.

azw
= 2 labor hours , ow =
$7
What are hourly wages
of workers and what
acc = 1 labor hours , Pc = $4 they’re gonna specialize
producing?

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 2. One-factor economy
13 Relative prices and supply
•

in W
specialize

C
specialize in

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 If
PW =

PC PW =

aW both goods are produced , any production on the PPF maximizes the value of reve
e

Note :

W : relative price of winee

PLW
:
opportunity cost of wine in terms of cheese
a

of a
Fr - opportunity cost of 1) in term

-get t
give

C
give <gett
give) get = No = W

GawaarEspalizeion product

↳
>
-

oppotunity cost of C in term of

 2. One-factor economy
14 Relative prices and supply
•

=
Opportunity cost

= no trade
of goods= relative unit labor requirements
.

relative prices

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 ↑
15 2. One-factor economy: with trade
•

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 Consider
Foreign) suchthe
2 countries (Home &

(
Home has smaller opportunity cost of cheese than Foreign and vice versa
>
-
,

>
- Foreign has comparative advantage in cheese ,
and Home has comparative

advantage in wine

>
-
Note that country side (Land ( )
*
and absolute productivity do not affect the pattern

of comparative advantage .

>
-
If only ac LaFic ,
Home produce labor is more efficient than Foreign in

cheese Home has absolute advantage

producing >
-
in
producing cheese

NOT COMPARATIVE ADVANTAGE (We need 4 terms to identify comparative advantage).

 16 2. One-factor economy: with trade
•

Cheese *
Home
Wine
Foreign
When
I (<Foreign
country
PW *
p W
↳ price to sale

cheese
compare
wine in
Home country
Home is Shipping Cheese to Foreign to get higher price of cheese e
cheeseinterin
Foreign is shipping Wine to Home to get higher price of wine > L
-

cheese
if the sale
careabsoluteadvantag
Do not => should
in
Foreign

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If An or G a indifferent between producing any relative aro e

C Pattern of Specialization and World Relative

= = ,

17 of 2 goods (H
Supply both countries
•
General equilibrium analysis

-)
&
s
a
·
cheede No trade

in F F
: N +
C
I
C
Cheese - 11
3
-
:

1) c &
Home : Cheese

cheese
Wine
F ·

line) equiansee Trading no

Home wine production
(no
C in

-
4

Morelative
X -
P
=
Tw
3 = c + W No trade
=> trade
(wine) (Forley
: Wine (
nh)
Luxc di.

>0 >
-
up

LO - down

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 Pattern of Specialization and World Relative
17
Supply
•
General equilibrium analysis

(5)
Ca Hi Trade
No trade

W ②

free
F : C+W
trade

Trading
PW
F: W
Etrade
·

2
a
a H
=
ALW E No trade
FE (9tFW
+C
Trade
Cl&
p

~CFLAEFNo
Lat Home
:
We

Wine
trade
*
*C

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 -

Ado xuong wa diving Long RDphan anh hieu ing they the

giao diem
 =-
Qu e e
EQ Go o
= 600

1QC
Qu = -

Q H : So t
=
5
*

Q* = 400 GQ C
-

1
21 Constructing the World PPF
W
W

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 22 Gains from trade

i
• International trade allows
Home and Foreign to
consume more than it can
produce gain from trade.
• If countries specialize
according to their comparative
advantage, they all gain from
this specialization and trade.
• TF, T*F*: consumption
possibility line
• PF, P*F*: production
possibility line
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 Home : cheese

complete specialization - produce

= <
nam giv cas gia Mi nay
LF Wine
phai
:

'Trangthai can
o bang gia thing doca Cheese
producing cheese and then trading the cheese for wine.

Gains from trade: numerical example

Produce W I hour
24 :
=I gallon
wine-
Home drink

& PC 1 = PW 1 gallons
=

pound 2
=
I hour I =
> trade W :
:
Produce C-

• Home can use one hour of labor to produce 1/aLW = 1/2 gallon of wine if it does
not trade.
• Alternatively, it can use one hour of labor to produce 1/aLC = 1 pound of cheese,
sell this amount to Foreign, and obtain 1 gallon of wine (better).

Produce C : > 116

1 hour- pound
Fcheese
& Produce - trade C 1PW 1PCF) I product
of Cheste
=
)
=

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 cost additional cost I hour
Thi trising lao dong dai rava canh trank Margin =

Cac hang tracho Cong chan gia tri sanpham can bien ca ho

vol vie" dish chiphi can bin

diennay thong dising gia thes
 Mulching thing doca ngui lao dong via mot qui giala s tien ho di tra

mi gior

Do Lo su biet v congrighi giv 2 quo gia nen therung mai hang ha - I am tien Wing ·L
quo gia bang nho

Mot quo gia co 10 they try et doca 2 mat hang se di hising micking cas hom san thising mai
Nang suat va nang hic cann trank

Lam Thing 1 : quo gia d manh dechong lai su cank trank ca mic ngoai
Thing mai tido chico line mot

Laplan nay Khong tha whan roing thiping mai dia tren lo: Theso sainh dus king phai 1 the thyit doi

Do s lao dong Pauper

Khas Khino dua tren
Canh trann mo ngoai la Khong Long bang va gay Tn hai cho ca quo gia
mic livingthap

Khaitha
Thing mai lam cho ngui lao ding oca quo gia co micking that hou troven toite hon .

Trong truing hop Khong lo thing man whing ngueilao ding nay se troi nin to te hon

T chot co hoi Xuat Khan lalen an dan nghio tieptus nghio

.
 (i = 1
,
....
)
Foreign
Multiple product Ali
at
:

Pi
tome

-Kit : viVeischeaper
duce i in Foreign

=> Pi = (Xeptheo thi th toing dan)

p** =>
-L <a ...

aIn
=>
i LaLi Wi
 tile. mucking trong vangoai

mi
 31
EXAMPLE

GHome

(Foreign
• Assume relative wage rate between Home & Foreign is 3 (w/w*=3)
• Produce at Home? …………………………………………..
• Produce in Foreign?………………………………………..

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 WitN K : at
i =
3 =

1) t Forienge = WXALi
i
/W x ati
*

L I
=> = Enchiladas <Date > Caviar >Bananas Applesa
0 75
. < 274/8218 = Pi < p+

Home (S 3
 COMPARATIVE ADVANTAGE WITH
32 MANY GOODS
• Both countries will gain from this specialization.
• Home has higher productivity in Dates, but why it should be produced in Foreign?
(Misconception 1)
Home unit labor Foreign unit labor
requirement requirement
6
> 4
12

Cheaper to produce in Foreign due to Home’s high w/w*=3

relative wage!

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 33 Relative wage in Multigood model
• To determine relative wages in a multigood economy we must look behind the relative
demand for goods (i.e., the relative derived demand).
• The relative demand for Home labor depends negatively on the ratio of Home to Foreign
wages.

Why?

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34 Relative wage in Multigood model

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 Adding Transport Costs and Nontraded Goods
35
• There are three main reasons why specialization in the real international economy is not
extreme:
• The existence of more than one factor of production.
• Countries sometimes protect industries from foreign competition.
• It is costly to transport goods and services.
• The result of introducing transport costs makes some goods nontraded.
• In some cases transportation is virtually impossible.
• Example: Services such as haircuts and auto repair cannot be traded internationally.

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 36 Exercise 1
Home has 1,200 units of labor available. It can produce two goods, apples and bananas. The
unit labor requirement inC C
-
apple production is 3, while in banana production it is 2.
-
-

a. Graph Home’s production possibility frontier. +

Foreig + World
b. What is the opportunity cost of apples in terms of bananas?
c. In the absence of trade, what would the price of apples in terms of bananas be? Why?

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 Home L =
1, 200 unit Foreign ↓* I 80
* A 160
a
LA
= 3 A = 40 a
A
= 5
=

2 1 , 200 B = 800
ULB = B =
a =
1
O I
600

800 EQT
=
*
QB
- Q
=
= -

&Q
I QA = -ale QB
1200 > slope -5 :
&

= - =
-

200
-a
1,
=

-
> Home
-
- =

M B
Home
~ Foreign 1

L
out
sor

&slope = -5

plopezz
160 E
for *
World's PPF

At -> LA LaB =A
·
1

1400 5
slope
-

=
608

-
-

=> F specialize in B
slope It
:
-5 specialize in A
lar 560 *
b) ·
Construct the world relative supply curve

a 5 ;
a=
=

alt
F
n
Lb .5
↳ =
0
= 0
1

QA +
O
a 1200/3
,

=
-

C
QB Qp +
* *
I - -

ser
(i Co 71 > -

up
L1- down
Relative Pa

PA
=
Th

Las
A I

DB QPR
1 1
L
L 1/2

I
5 1/5
1
RD
-

Q- -
-
38

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