Labor Productivity and

Comparative Advantage:
Ricardian Model
NANG SUAT LAO DONG VA LOI THE SO SANH: MO HINH RICARO

Dr. Tran Thi Mai Thanh, VNU UEB

 LEARNING GOALS
After reading this chapter, you
should be able to:
• Understand the law of
comparative advantage
• What is the basis for trade
• Understand the relationship and what are the gains
between opportunity costs and from trade?
relative commodity prices
• What is the pattern of
• Explain the basis for trade and trade?
show the gains from trade under
constant costs conditions
 PREVIEW
1. The Mercantilists’ Views on Trade
2. Trade Based on Absolute Advantage: Adam Smith
3. Trade Based on Comparative Advantage: David Ricardo
4. Comparative Advantage and Opportunity Costs
5. Empirical Tests of the Ricardian Model

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 WHAT IS INTERNATIONAL TRADE?
• In a narrow sense, international trade is the exchange of goods
and services across national borders.
• In a broader sense, international trade is the exchange of goods,
services and resources (capital and labor) across national
borders.
Theo nghia hep: thuong mai quoc te la su trao doi hang hoa va dich vu qua bien gioi quoc gia

Theo nghia rong hon: thuong mai quoc te la s trao doi hang hoa dich vu, tai nguyen ( von va lao dong) xuyen bien gioi quoc gia
INTERNATIONAL TRADE IN
INTERNATIONAL ECONOMICS
International trade International trade
theories instruments

Lecture 2: The law of

Lecture 4: Tariff
comparative advantage

Lecture 5: Non-tariff
Lecture 3: H-O model
barriers
INTERNATIONAL TRADE THEORIES
ly thuyet thuong mai quoc te tan co dien
ly thuyet thuong mai quoc te co dien
Classical International Neo-classical International
Trade Theory Trade Theory

1. Mercantilism chu nghia trong thuong Opportunity cost and Comparative

2. Absolute Advantage loi the tuyet doi Advantage chi phi co hoi va loi the so sanh
3. Comparative Advantage loi the so sanh

Heckscher-Ohlin Theory

Factor Endowments and yeu to nguon luc

Comparative Advantage va loi the so sanh
1. THE MERCANTILISTS’
VIEWS ON TRADE
QUAN DIEM CUA CAC THUON NHAN VE THUONG MAI
 MERCHANTILIST’S VIEW
CHU NGHIA TRONG THUONG

su giau co cua mot quoc gia duoc do bang tru luong vang va bac
A nation’s wealth is measured by ON TRADE
stock of gold and silver quan diem cua merchantilist's ve thuong mai

danh gia cao vai tro cua dong tien

tich luy cang nhieu vang va bac cang tot
Accumulate as much gold and Appreciate the role of money
silver as possible Consider gold and silver as the only
coi vang bac là cua
form of wealth rieng nhu hinh thuc giau co
lam giau nho buon ban
Becoming rich by trade danh gia cao vai tro cua thuong mai
Appreciate the role of trade
khuyen khich xuat khau, han che/ cam nhap khau
• Encouraging export
• Restricting/ prohibiting import vai tro cua nha nuoc trong hoat dong thuong mai
The State’s role in trade activities

One nation gains thuong mai khong tu nguyen

at the expenses of other nations Zero-sum game; Involuntary trade

mot quoc gia dat duoc bang chi phi cua cac quoc gia khac
CONTRIBUTIONS
• The oldest, pioneer thoughts on International Economics
• Recognize the importance of trade
• Emphasize the government’s role in regulating trade
• Some ideas are still valid until today
LIMITATIONS
• Nature of the wealth of a nation: ban chat cua cua cai cua mot quoc gia
– Gold and silver - the only form of wealth vang va bac- hinh tuc duy nhat cua su giau co
– How about other resources such as human, man-made and natural
resources?
• Zero-sum game: Trade is beneficial for one nation at the expense
of other nations. thuong mai co loi cho mot quoc gia bang cai gia phai tra cua cac dan toc khac
• Assume that wealth increase through circulation, not in
production.
• Cannot explain the pattern of trade.
 2. TRADE BASED ON
THE ABSOLUTE ADVANTAGE
loi the tuyet doi
ASSUMPTION
• 2 countries, 2 goods
• Labor is the only production factor
• No barriers to trade
• No transportation cost
• Perfect competition in all markets
 co so thuong mai

THE BASIS FOR TRADE

• Absolute advantage loi the tuyet doi
• A nation has absolute advantage in producing a particular good
if it can produce that good more efficiently than the other
country. mot quoc gia co loi the tuyet doi trong viec san xuat mot mat hang cu the neu quoc gia do co the san xuat mat hang do hieu qua hon quoc
gia kia

• More efficient: higher productivity of labor (or lower labor cost)

hieu qua hon: nang suat lao dong cao hon ( hoac chi phi lao dong thap hon)
THE PATTERN OF TRADE
Mo hinh thuong mai

khi mot quoc gia co loi the tuyet doi trong san xuat mot mat hang, nhung bat loi tuyet doi so voi quoc gia kia ve mat hang thu hai, thi ca hai quoc gia deu co
the dat duoc loi ich bang cach chuyen mon hoa mat hang co loi the tuyet doi cua minh vao trao doi mot phan san luong de lay hang hoa cua minh bat loi the
tuyet doi

• When one country has absolute advantage in production of a

commodity, but an absolute disadvantage with respect to the
other nation in a second commodity, both nations can gain by
specializing in their absolute advantage good and exchanging
part of the output for the commodity of its absolute
disadvantage.
à Specialize in producing and export goods which a nation has an
absolute advantage and import goods which it has an absolute
disadvantage.
Chuyen san xuat va xuat khau nhung mat hang ma quoc gia do co loi the tuyet doi va nhap khau nhung mat hang ma quoc gia do khong co loi the tuyet doi
CONTRIBUTIONS DONG GOP

Chuyen mon hoa va thuong mai mang lai loi ich cho ca hai quoc gia
adam sth va cac nha kinh te hoc co dien khac ung ho chinh sach laissez-faire hoac su can thiep toi thieu cua chinh phu vao hoat dong kinh te

• Specialization and trade benefit both countries

• Adam Smith and other classical economists advocated a policy of
laissez-faire, or minimal government interference with economic
activity.
• Free trade would cause world resources to be utilized most
efficiently, maximizing the world welfare.
Thuong mai tu do se khien cac nguon tai nguyen tren the gioi duoc su dung hieu qua nhat , toi da hoa phuc loi the gioi
LIMITATIONS
No khong the giai thic thuong mai trong truong hop mot nuoc co loi the tuyet doi o ca hai mat hang va nuoc kia khong co loi the
tuyet doi o mat hang nao
- My co loi the tuyet doi trong sx ca lua mi va vai
- Anh khong co loi the tuyet doi trong bat ki hang hoa nao

• It cannot explain the trade in the case that one country has absolute
advantage in both goods and the other does not have absolute
advantage in any goods.
• The US has absolute advantage in producing both wheat and cloth.
• The UK does have absolute advantage in producing any goods.
 3. TRADE BASED ON
COMPARATIVE ADVANTAGE
THUONG MAI DUA VAO LOI THE SO SANH
 COMPARATIVE ADVANTAGE
So sanh loi the va chi phi co hoi
AND OPPORTUNITY COST
- Mo hinh ricado: su khac biet ve nang suat L giua cac quoc gia gay ra su khac biet ve nang suat , dan den loi ich
tu thuong mai
-Mo hinh ricardo su dung cac khai niem ve chi phi co hoi va loi the so sanh
• Ricardian model: differences in productivity of L between
countries cause productive differences, leading to gains from
trade.
• Ricardian model uses the concepts of opportunity cost and
comparative advantage.
• The opportunity cost of producing good X is the cost of not
being able to produce good Y because resources have already
been used to produce good X.
Chi phi co hoi cua viec sx hang hoa X la chi phi khong the sx hang hoa Y vi cac nguon luc da duoc su
dung de sx hang hoa X
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 COMPARATIVE ADVANTAGE AND OPPORTUNITY COST
(cont.)
• A country has a comparative advantage in producing a good if the
opportunity cost of producing that good is lower in the country
than it is in other countries.
• A country with a comparative advantage in producing a good uses
its resources most efficiently when it produces that good
compared to producing other goods.
- Mot quoc gia co loi the so sanh trong viec san xuat mot hang hoa neu chi phi co hoi de sx hang hoa do o
nuoc nay thap hon so voi cac nuoc khac
- Mot quoc gia c loi the so sanh trong vie sx 1 hang hoa se su dung cac nguon luc cua minh mot cach hieu
qua nhat khi nuoc do sx ra hang hoa do so voi viec sx ra cac hang hoa khac

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A ONE FACTOR RICARDIAN MODEL

David Ricardo “The principles of political economy, and

(1772-1823) taxation” (1817)
 ASSUMPTION
• An example with roses and PCs explains the intuition behind
the Ricardian model.
• The Ricardian model assumes:
1. L is the only resource for production.
2. The supply of L in each country is fixed.
3. Only 2 goods are produced and consumed: WHEAT and CLOTH.
4. L is not specific to either industry.
5. Only 2 countries: HOME and FOREIGN.

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 BASIS FOR TRADE
- ngay ca khi mot quoc gia kem hieu qua hon quoc gia kia trong viec sx ca 2 mat hang thi van co co so co loi ve
mat thuong mai
- cstm: loi the so sanh
• Even if a nation is less efficient than the other nation in the
production of both commodities, there is still a basis for
mutually beneficial trade.
• Basis for trade: Comparative advantage
• A country has a comparative advantage in producing one good
when its absolute advantage in producing this good is greater; or
its absolute disadvantage is smaller.
– Higher relative productivity or lower relative cost
- Mot quoc gia co loi the so sanh trong viec sx 1 mat hang khi loi the tuyet doi cua quoc gia do trong viec
sx mat hang nay lon hon, hoac bat loi tuyet doi cua no' la` nho hon
- Nang suat tuong doi cao hon hoac chi phi tuong doi thap hon
 THE PATTERN OF TRADE

• A nation should specialize in the production and export of

the commodity that it has comparative advantage and
import the commodity that it has comparative
disadvantage.
Mot quoc gia nen chuyen mon hoa sx và xk mat hang ma quoc gia do co loi the so sanh
và nk mat hang ma quoc gia do khong co loi the ss
 CONTRIBUTIONS

• One of the most important theories with many practical

applications.
• Explain the pattern and gains of trade even when one nation is less
efficient than the other nation in the production of both
commodities.
- Mot trong nhung ly thuyet quan trong nhat voi nhieu thuc te cac ung dung
- Giai thich mo hinh va loi ich cua thuong mai ngay ca khi mot quoc gia kem hieu qua
hon quoc gia kia trg viec sx ca hai mat hang
 LIMITATIONS
• Determining comparative advantage based on the labour theory
of value xac dinh loi the ss dua tren ly thuyet lao dong co gia tri

– Labour is the only factor in production lao dong la yeu to duy nhat cua sx

– Labour is used in the same fixed proportion in the production

of all commodities ld duoc sd theo cung mot ti le co dinh trong sx cua tat ca cac mat hang

– Labour is homogeneous lao dong la dong` nhat

• Have not explained the sources of comparative advantages

- Chua giai thich duoc nguon goc cua loi the so sanh
4. COMPARATIVE ADVANTAGE AND
OPPORTUNITY COSTS
 • Determined comparative advantage based on opportunity
cost (OC), not on labor productivity
COMPARATIVE
ADVANTAGE AND
OPPORTUNITY COSTS

Determined comparative
advantage based on
opportunity cost (OC), not
on labor productivity
loi the ss duoc xac dinh dua tren
chi phi co hoi (OC) khong dua
tren nang suat lao dong
Gottfried von Haberler The Theory of International Trade
(1900-1995) (1936)
OPPORTUNITY COSTS
• The opportunity cost of a commodity is the amount of a second
commodity that must be given up to release just enough resources
to produce one additional unit of the first commodity.
• Limited resources -> The trade-off

- Chi phi co hoi cua mot hang hoa la so luong hang hoa thu hai phai tu bo de giai phong vua du nguon luc
de sx them 1 don vi hang hoa thu nhat
- Nguon luc han che -> su danh' doi?
BASIS FOR TRADE
• Basis for trade: Comparative advantage
• A nation has a comparative advantage in a commodity if it can
produce this commodity at a lower opportunity cost than the other
nation.
US UK US UK
W (unit/hour) 6 1 OC of Wheat 2/3C 2C
C (unit/hour) 4 2 OC of Cloth 3/2W 1/2W

-> US has comparative advantage in production of wheat

-> UK has comparative advantage in production of cloth
PATTERN OF TRADE
• The US should specialize in producing wheat and export wheat to
the UK.
• The UK should specialize in producing cloth and export cloth to
the US.
THE PRODUCTION
Production POSSIBILITY
Possibility Frontier (PPF)
FRONTIER (PPF)
• PPF is a curve that shows the alternative combinations of the
PPF la mot duong cong the hien cac ket hop thay the cua 2 mat hang ma mot quoc gia co the sx bang cach tan dung triet de tat ca cac nguon
luc cua minh voi cong nghe tot nhat hien co
• PPF istwo
a curve that showsthat
commodities the aalternative
nation cancombinations
produce by of the utilizing
fully two commodities that
a nation can
all of itsproduce by with
resources fully utilizing
the best all of its resources
technology with
available tothe
it. best technology
available to it.
Y Y PPF under
PPF under increasing cost
constant cost

*C
*B
*A
X X

• do
• What points
What outside
do points the PPF
outside curve
the PPF (C)(C)
curve represent?
represent?
• do
• What What do points
points insideinside the PPF
the PPF curve
curve (A)(A) represent? ?
represent?
CONTRIBUTIONS AND LIMITATIONS
- xac dinh loi the so sanh du tren chi phi co hoi ( lao dong khong nhat thiet la yeu to sx duy nhat )

CONTRIBUTIONS
• Determining comparative advantage based on opportunity cost
(labor is not necessarily the only factor of production)
• PPF curve and demonstrating the benefits from trade
LIMITATIONS
• Constant opportunity cost
• Have not explained the sources of comparative advantages
- Chi phi co hoi khong doi
- Chua giai thich duoc nguon goc cua loi the ss
 SUMMARY
• This chapter examined the development of trade theory from the
mercantilists to Smith, Ricardo, and Haberler and sought to
answer two basic questions:
• (a) What is the basis for and what are the gains from trade? and
• (b) What is the pattern of trade?
• The mercantilists: a nation could gain in international trade only
at the expense of other nations à restrictions on imports,
incentives for exports, and strict government regulation of all
economic activities.
 SUMMARY
• Adam Smith: trade is based on absolute advantage and benefits
both nations à trade is positive sum game. Due to some
limitations, absolute advantage explains only a small portion of
international trade today.
• David Ricardo introduced the law of comparative advantage: even
if one nation is less efficient than the other nation in the
production of both commodities, there is still a basis for mutually
beneficial trade. Ricardo, however, explained the law of
comparative advantage in terms of the labor theory of value, which
is unacceptable.
 SUMMARY
• Gottfried Haberler: explaining the law of comparative advantage in
terms of the opportunity cost theory.
• A straight-line production possibility frontier reflects constant
opportunity costs.
• With trade, each nation can specialize in producing the commodity
of its comparative advantage and exchange part of its output with
the other nation for the commodity of its comparative
disadvantage à both nations end up consuming more of both
commodities than without trade.
 A LOOK AHEAD
In the following lecture, we extend our trade model to more than
one factor of production that helps properly examine the basics of
trade and gains from trade.

H-O MODEL
 KEY TERMS
• Absolute advantage, p. 34
• Basis for trade, p. 31 Complete
• specialization, p. 47
• Constant opportunity costs, p.
43
• Gains from trade, p. 31
• Labor theory of value, p. 41
• Laissez-faire, p. 35
• Law of comparative advantage,
p. 36
• Mercantilism, p. 32
• Opportunity cost
• theory, p. 42
• Pattern of trade, p. 31
• Production possibility frontier,
p. 42
• Relative commodity prices, p. 44
• Small-country case, p. 47