Chapter 3. Labor Productivity and Comparative Advantage: The Ricardian Model. Last Class. Last class, we covered: Gravity Model Based on this model, what does the value of trade between 2 countries depend upon? What factors reduce trade?
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Labor Productivity and Comparative Advantage: The Ricardian Model
Last class, we covered:
B. It takes Maria two hours to read 100 pages of sociology. In that time, she could read 40 pages of economics. So the opportunity cost of 100 pages of sociology is 40 pages of economics.
Labor required for each gallon of wine produced
Total pounds of cheese produced
Labor required for each pound of cheese produced
Total gallons of wine producedProduction Possibilities
aLCQC + aLWQW≤ L
Based on this PPF, how do we know we have constant labor productivity?
QW = L/aLW – (aLC /aLW )QC
1 hour/(aLW hours/gallon of wine)
= (1/aLW) gallons of wine
1 hour/(2 hours/gallon of wine)
= ½ gallon of wine.
PC /PW = aLC/aLW
aLC < a*LC and aLW < a*LW
aLC/aLW < a*LC/a*LW
where “*” notates foreign country variables
RS = (QC + Q*C)/(QW + Q*W)
aLC/aLW < PC /PW =a*LC/a*LW ,
aLC/aLW < a*LC/a*LW < PC /PW,
Unit labor requirements for home and foreign countries
1/2 = aLC /aLW < a*LC /a*LW = 2
PC/aLC = $12 /1= $12
PW/a*LW = $12/3 = $4
$12/$4 = 3
Source: International Monetary Fund, Bureau of Labor Statistics, and The Conference Board