Lecture 6 ricardo model relative wages and productivity
This presentation is the property of its rightful owner.
Sponsored Links
1 / 22

Lecture 6: Ricardo model: Relative wages and productivity PowerPoint PPT Presentation


  • 210 Views
  • Uploaded on
  • Presentation posted in: General

Lecture 6: Ricardo model: Relative wages and productivity. ECO 3024F. Structure. Wages and productivity Limitations of Ricardo Model Empirical evidence Readings Ch 1 , 2 & 3 of Krugman and Obstfeld Golub, S. 1998. Does trade with low wage economies hurt American workers [READER] ?

Download Presentation

Lecture 6: Ricardo model: Relative wages and productivity

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Lecture 6 ricardo model relative wages and productivity

Lecture 6: Ricardo model: Relative wages and productivity

ECO 3024F


Structure

Structure

Wages and productivity

Limitations of Ricardo Model

Empirical evidence

Readings

Ch 1 , 2 & 3 of Krugman and Obstfeld

Golub, S. 1998. Does trade with low wage economies hurt American workers [READER]?

Edwards, L & Golub, S. 2003. South Africa’s international cost competitiveness: A sectoral analysis. [READER]

Krugman. P. Ricardo’s difficult idea [READER]


Question

Question

Can South Africa compete against China where wages are between 5 and 10 times lower?

Will trade force down SA workers wages down to those of China?

Some views:

“Companies that produce goods in foreign countries to take advantage of cheap labor should not be permitted to dictate the wages paid to American workers”

“Impose a tax or tariff on goods brought into this country equal to the wage difference”

Quotes cited in Golub (1998)

What are your views on this?

Can the Ricardo model provide any insight into this?


Discussion

Discussion

  • Golub (1998)

    • Wages are determined by absolute advantage

    • Trade is determined by comparative advantage

  • What is cost of product?

    • Cost = wage*unit labour requirement

    • In our example: Costx = Wxax

      Costy = Wybx


Relative wages productivity

Relative wages & productivity

  • Home will produce a good ifcost home < cost competitor

  • Home produces and exports X if

    CostHX = WHaH < WFaF = CostFX

  • i.e. if WH/WF < aF/aH

    • Recall: 1/aH = MPLXH

  • aF/aH = MPLXH/MPLXF

  • Home exports if Relative wage < Relative productivity


South african cost competitiveness

SA vs DEVELOPED Countries

0.6

0.5

0.4

0.3

0.2

0.1

0

1970-79

1980-89

1990-94

1995-98

wages

productivity

South African cost competitiveness

Source: Edwards and Golub (2003)


South african cost competitiveness1

SA against DEVELOPING Countries

3.5

3

2.5

2

1.5

1

0.5

0

1970-79

1980-89

1990-94

1995-98

wages

productivity

South African cost competitiveness

Source: Edwards and Golub (2003)


Lecture 6 ricardo model relative wages and productivity

Although in the simple Ricardian model, we never directly referred to wages (only to productivity), the relative wage – relative productivity relationship existed behind the scenes.


Data recap

Data recap

Unit labour per unit output

IndustryHomeForeign

X(coffee)ah = 1af = 6

Y(cloth)bh = 2bf = 3

When: 1/2 < PX/PY < 2 :

Home specializes in X & Foreign specializes in Y

Other insights?

Home: 6 times as productive in X (MPLXH/MPLXF = af/ah)

Home: 1.5 times as productive in Y (MPLYH/MPLYF = bf/bh)


Relative wages

Relative wages

New world price ratio P* = 1

Assume: price of X = R 30 = price of Y

What is the wage in each country?

Wage = MPL * Price (or P/unit labour cost)

Home: WH = MPLX *PriceX = 1*R30 = R30

Foreign: WF = MPLY *PriceY = 1/3*R30 = R10

Relative wage: WH/WF = R30/R10 = 3


Lets plot relative wages relative productivity

Relative wage = 3

Relative productivity in Y = 1.5

Relative productivity in X = 6

Lets plot relative wages & relative productivity

Relative wage is between productivity ratios:

Each country has Cost Advantage in production

Home:

in X: 6 times more efficient but only 3 times more expensive

Foreign:

in Y: 2/3 as productive, but pays 1/3 the wage

Solution:

Each product gets produced where it is the cheapest to produce!

Question: What happens if Px rises?


Multiple goods model

Multiple goods model


Do the results change if we introduce multiple goods

Do the results change if we introduce Multiple Goods?

Unit labour requirements

IndustryHomeForeignRel Prod

X(coffee)ah = 1af = 66

Y(cloth)bh = 2bf = 31.5

Z (apples) 1 1010

W (leather) 1 11

Order these by ratios of industries' productivities:

MPL1H/MPL1F < MPL2H/MPL2F < … < MPLnH/MPLnF

And plot on the relative w and relative productivity scale


Multiple goods model1

1.5

10

1

6

Relative productivity in W (leather)

Relative productivity in Y (cloth)

Relative productivity in X (coffee)

Relative productivity in Z (apples)

Increasing relative productivity of Home

If relative wage (WH/WF) lie here, then Home exports coffee and apples and imports cloth and leather

If relative wages (WH/WF) fall to here, then Home exports coffee, apples and cloth and imports leather

Multiple Goods model

Relative wage = WH/WF

Discuss the adjustment process if relative wages are too low


Note we can construct our multiple goods model as follows see k o

Relative L supply

RS*

Wh/Wf

apples

10

coffee

6

cloth

1.5

leather

1

Lh/Lf

Note: We can construct our multiple Goods model as follows (see K&O)


Sub conclusions

Sub-conclusions

The competitiveness of an industry depends not only on relative wages but also on relative productivity

Relative wages generally follow relative productivity

Export products where relative productivity > relative wages

Declining terms of trade (Pexport/Pimport) negatively affect relative wages


Limitations of model

Limitations of model

What are the limitations of model?

Model assumes full specialization

What are the sources of labour productivity? Capital?

Need to include other factors of production

What about transport costs?

Income distribution: Model predicts that all factors gain

Cannot explain intra-industry trade


Schematic transport costs

Relative productivity in W (leather)

Relative productivity in Y (cloth)

Relative productivity in X (coffee)

Relative productivity in Z (apples)

Non-tradable products produced by both Home and Foreign

Schematic: Transport costs

Relative wage = WH/WF

With transport costs, goods at the margin no longer become profitable to trade


Empirical evidence

Empirical evidence

Is there any support for the Ricardo model? i.e. Does it predict trade flows?

Read

Golub, S. 1998. Does trade with low wage economies hurt American workers?

Edwards, L & Golub, S. 2003. South Africa’s international cost competitiveness: A sectoral analysis.


Does sa cost competitiveness affect exports

Does SA cost competitiveness affect exports?

1970-79

1980-89

3.00

2.00

1.80

2.50

1.60

1.40

2.00

1.20

RULC

1.50

RULC

1.00

0.80

1.00

0.60

0.40

0.50

0.20

0.00

0.00

0

500

1000

1500

2000

2500

3000

3500

0

500

1000

1500

2000

2500

3000

3500

4000

Real exports (R million)

Real exports (R million)

1990-98

1990-98

2.00

2.00

1.80

1.80

1.60

1.60

1.40

1.40

1.20

1.20

RULC

1.00

RULC

1.00

0.80

0.80

0.60

0.60

0.40

0.40

0.20

0.20

0.00

0.00

0

1000

2000

3000

4000

5000

6000

7000

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Real exports (R million)

Exports/Output


Does sa cost competitiveness affect exports1

Does SA cost competitiveness affect exports?

Source: Edwards and Golub (2003)


Conclusion

Conclusion

International competitiveness

  • SA competitive, as measured by RULC, in most sectors vis-à-vis developed countries, but not developing countries

  • SA competitiveness improved during the 1990s

  • but improvement substantially reflects the large depreciation of the rand against other currencies

  • No clear pattern of competitiveness at the sectoral level over time

    Effect of competitiveness on exports

  • South African exports respond strongly to labor cost competitiveness (relative wages and relative productivity) (particularly L-intensive)

  • Growth in exports during the 1990s in large measure due to improved relative unit labor costs


  • Login