Chapter 2 Labor Productivity （ 劳动生产率 ） and Comparative Advantage （ 比较优势 ） : The Ricardian Model

1. Chapter 2 Labor Productivity（劳动生产率）and Comparative Advantage（比较优势）: The Ricardian Model （李嘉图模型）

2. Why we study Ricardian model first. Ricardian model is basic, classicaland most important one in theory of international trade. We can say that the modern international trade theory comes from the Ricardian Model.

3. David Ricardo April 18, 1772 — September 11, 1823 David Ricardo had a varied upbringing. He was born in 1772 and was the third of 17 children. His parents were very successful and his father was a wealthy merchant banker. They lived at first in the Netherlands and then moved to London.

4. David himself had little formal education and went to work for his father at the age of 14. However, when, at the age of 21, he married a Quaker (against his parents wishes) he was disinherited and so set up on his own as a stockbroker.

5. He was phenomenally successful at this and was able to retire at 42 and concentrate on his writings and politics. Ricardo got elected into the British parliament in 1819

6. Chapter Organization • The Concept of Comparative Advantage • A One-Factor Economy（单一要素经济模型） • Trade in a One-Factor World • Misconceptions(误解) About Comparative Advantage • Comparative Advantage with Many Goods • Adding Transport Costs and Nontraded Goods（非贸易品） • Empirical（实证的）Evidence on the Ricardian Model

7. 一、Introduction Why countries trade each other

8. Countries engage in international trade for two basic reasons: • They are different from each other in terms of climate, land, capital, labor, and technology. For example, China and U.S. • They try to achieve scale economies in production, such as Boeing and airbus.

9. The next four chapters develop tools to help us to understand how differences between countries give rise to trade between them and why this trade is mutually beneficial. • The essential concept in this analysis is that of comparative advantage.

10. The Ricardian model is based on technological differences across countries. • These technological differences are reflected in differences in the productivity of labor.

11. 二、The Concept of Comparative Advantage (page 10) • 1、The story about the Valentine’s day(情人节) in the textbook • The case of winter roses offers an excellent example of the reasons why international trade can be beneficial .

12. Hypothetical changes in production

13. 2、Absolute Advantage • A country has an absolute advantage in a production of a good if it has a lower unit labor requirement(aLW 单位产品劳动投入)than the foreign country in this good.

14. The exercise Table 1: Technology in the U.S. and the JapanUnit Labor DemandsCountry Wheat AutomobilesUnited States 15 5Japan 2 1/10 1. Referring to Table 1, the United States has the absolute advantage in the production of:a) Wheatb) Automobilesc) Both wheat and automobilesd) Neither wheat nor automobiles

15. 3、Opportunity Cost • The opportunity cost of roses in terms of computers is the number of computers that could be produced with the same resources as a given number of roses.

16. Labor Required to make: In the U.S. In the R.O.W. 1 television 8 hours 4 hours 1 computer 3 hours 3 hours 2. Referring to the table above, the opportunity cost of one television in the U.S. is: a. 8/3 computer. b. 3/8 computer. c. 4/3 computer. d. 3/4 computer.

17. 4、Comparative Advantage • A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries.

18. 3. Referring to the table above, the U.S has a comparative advantage in: a. televisions. b. computers.

19. 5、The principle of comparative advantage : • (The example in Table 2-1 illustrates ) • If each country exports the goods in which it has comparative advantage (lower opportunity costs), then all countries can gain from trade.

20. What determines comparative advantage? • Answering this question would help us understand how country differences determine the pattern of trade. • In order to reach a model of international trade, we must assume that we are dealing with a one-factor economy.

21. 三、A One-Factor Economy（page12） • 1、Assume that we are in a one-factor economy • Labor is the only factor of production. • Only two goods (say wine and cheese) are produced. • The supply of labor is fixed in each country. • The productivity of labor in each good is fixed. • Perfect competition prevails in all markets.

22. 2、The unit labor requirement （单位产品劳动投入） The labor productivity is determined by unit labor requirements. The unit labor requirement is the number of hours of labor required to produce one unit of output, such as aLW (wine)and aLC (cheese) The economy’s total resources are defined as L, the total labor supply.

23. 3、 Production Possibilities frontier （生产可能性边界） • The opportunity cost is determined by production possibilities • Production Possibilities: • The production possibility frontier (PPF) of an economy shows the maximum amount of a good (say wine) that can be produced for any given amount of another (say cheese).

24. The PPF of our economy is given by the following equation: • aLCQC(奶酪总量) + aLWQW(葡萄酒总量)≤ L • (2-1)

25. Figure 2-1: Home’s Production Possibility Frontier Home wine production, QW, in gallons Absolute value of slope equals opportunity cost of cheese in terms of wine P F Home cheese production, QC, in pounds L/aLW L/aLC

26. The opportunity cost of cheese in terms of wine is aLC/aLW (how many wines could be produced by aLC).

27. 4、Relative Prices（相对价格）and Supply • The particular amounts of each good produced are determined by prices. • The relative price of good X is the amount of good Y that can be exchanged for one unit of good X. • PC / PWDenote(表示)the relative price of cheese

28. The movement of labor to whichever • sector pays the higher wages. • If PC / aLC （小时工资）>PW / aLW , we can get • PC / PW（相对价格）> aLC / aLW（机会成本） . • If PC / PW> aLC / aLW, it will specialize in the production of cheese. • If PC / PW< aLC / aLW , it will specialize in the production of wine.

29. －If PC / PW=aLC / aLW , both products will be produced. －In the absence of trade, both goods are produced, and therefore PC / PW = aLC /aLW. Why?

30. 四、Trade in a One-Factor World(P14) (单一要素世界中的贸易) After we learned a one-factor economy, now we should deal with Trade in a One-Factor World------ 1+2+2 Model.

31. 1、Assumptions of the model: • There are two countries in the world . • Each of the two countries produces two goods. • Labor is the only factor of production. • The supply of labor is fixed in each country. • The productivity of labor in each good is fixed. • Labor is not mobile across the two countries. • Perfect competition prevails in all markets.

32. 2、Absolute Advantage • Assume that aLC < a*LC and aLW < a*LW • This assumption implies that Home has an absolute advantage in the production of both goods. • It is comparative, not absolute, advantage that determines the international trade.

33. 3、Comparative Advantage • Assume that aLC /aLW < a*LC /a*LW (2-2) • This assumption implies that the opportunity cost of cheese in terms of wine is lower in Home than it is in Foreign. • Home has a comparative advantage in cheese and will export it to Foreign in exchange for wine.

34. In the absence of trade the relative prices of cheese and wine in each country would be determined by the relative unit labor requirements. That is aLC /aLW and a*LC /a*LW. Once we allow for the possibility of international trade, prices will no longer be determined by domestic considerations. The trade above can not go on indefinitely. It will equalize the relative price.

35. 4、Determining the Relative Price After Trade • What determines the relative price (PC / PW) after trade? • To answer this question we have to define the relative supply and relative demand for cheese in the world as a whole.

36. The relative supply of cheese : • (QC + Q*C )/(QW + Q*W) • The relative demand of cheese: • A decreasing function of the price of the cheese relative to that of wine.

37. Relative price of cheese, PC/PW RS RD RD' Q' L/aLC L*/a*LW Relative quantity of cheese, QC + Q*C QW + Q*W Figure 2-3: World Relative Supply and Demand a*LC/a*LW 1 2 aLC/aLW

38. How to understand the Figure 2-3: • The world equilibrium (均衡) relative price after trade is determined by the intersection of RD and RS. • First, no supply of cheese if PC / PW < aLC / aLW (specialization in wine in both countries). • secondly, supply any relative amount of the two goods in home if PC / PW =aLC / aLW (flat section in curve).

39. Next, specialized production of cheese in home if PC / PW > aLC / aLW. • If PC / PW between aLC / aLW and a*LC /a*LW , the relative supply of cheese is L/aLC / L*/a*LW . • Then, supply any relative amount of the two goods in foreign if PC / PW = a*LC /a*LW. • Finally, no supply of wine if PC / PW >a*LC /a*LW. • (specialization of cheese in both countries).

40. The equilibrium relative price of cheese is determined by the intersection of the relative supply and demand curves in Figure 2-3. • The point 1 in Figure 2-3 shows that the relative price of cheese is between the two countries’pretrade（贸易前）prices, it is the normal result of trade. • In this case each country specializes in the production of the good in which it has a comparative advantage.

41. The point 2 in Figure 2-3 shows that the relative price of cheese is equal to its opportunity cost in Home. The Home economy need not specialize in producing either cheese or wine. • It remains true that if a country does specialize, it will do so in the good in which it has a comparative advantage.

42. 四、Case study Labor Productivity in China.

43. 表1农业劳动生产率的国际比较 农业劳动力占全部劳动力的％ 农业劳动生产率 1988年 1998年 1987-89年 1997-99年 中国72.6 68.0 222 316 美　 国3.0 2.2 — 39 001** 澳大利亚5.7 4.7 22 932 31 432 荷　 兰4.7 3.4 31 328 51 594 日　 本8.0 4.6 21 914 30 620 俄 罗 斯— 11.1 — 2 282 泰 　国65.4 58.0 754 916 越 　南71.7 68.2 173 236 印　 度65.1 60.5 324 395 资料来源：粮农组织、世界银行《2002年世界发展报告》， 劳动生产率指一个农业劳动者创造的增加值。

44. 表2 全球钢铁企业劳动生产率比较： 韩国浦相制铁——1350吨/人年 日本新日铁 ——1400吨/人年 鞍 钢————220吨/人年 我 国————100吨/人年