econ 340 lecture 4 homework 3
If the unit labor cost for good X is (4/5) and for good Y is (3/7), then the opportunity cost of producing one unit of Y in terms of X is
(15 / 28)
Let Hx be the unit labor cost of X and Hy the unit cost for Y for country H, and similar Fx and Fy for country F. If country H has a comparative advantage in X, then
(Hx / Hy) < (Fx / Fy)
Which of the following is true in the Ricardian model studied in class?
Technological improvements in Foreign only hurt Home if they are biased towards Home's export
In a two-good Ricardian model, a country has absolute advantage in both goods if and only if
its unit labor requirement is lower for both goods
What factor(s) is(are) used in the production of goods in Ricardian model
labor
Which of the following statements is consistent with the Ricardian model studied in class? A Trade with countries that pay low wages hurts workers in high-wage countries B Free trade exploits less productive countries C A country will always gain from trade
none of the above
Unit labor requirement is defined as the
number of units of labor required to produce one unit of output
The basic impetus for trade in the Ricardian model is:
technological differences
The Ricardian model outlines the first basic reason for trade we will study:
technology differences
True or false: In the two country two good Ricardian model, it is impossible to have comparative advantage the production of both goods
true
True/ False: In the Ricardian model, prices only change when opening up to trade if the country completely specializes in the production of one good.
true
True/ False: In the Ricardian model, the only way both countries gain from trade is if there is complete specialization
true
True/False: The Ricardian model predicts that differences in wages across countries are correlated with labor productivity differences
true
True or False: If there is productivity catch up in Foreign, then the Home country can lose its comparative advantage, and Foreign can have comparative advantage in both industries
false
True or False: In the Ricardian model, knowing who has comparative advantage in each good is enough to know the quantity of exports and imports to/from each country.
false
True or False: In the Ricardian model, you always produce only the good you have comparative advantage in producing.
false
True/False: In the Ricardian model, a country's PPF is linear because trade-off between producing goods is variable
false
True/False: In the Ricardian model, both country necessarily gain from trade
false
The Ricardian model predicts that after trade
goods' prices equalize across countries
Ricardian Model Setup
-Two countries, Home and Foreign -Two goods cloth c and food f -Demand Dc and Df (as before) -Each good is produced using one factor: labor L with constant returns to scale. -In autarky and trade, countries must decide on the allocation labor to the production of goods. Workers move freely between industries. -All markets are competitive so that wine and cloth producers take prices and wages as given
If, instead, one country produces both goods:
-relative prices must be identical to autarky ones for that country -with no prices changes, welfare unaffected by trade
The Ricardian model is extremely simple in that:
1. All workers are identical (or units of skill are perfect subst.) 2. Workers costlessly transition between sectors 3. All markets are perfectly competitive and all markets clear (no unemployment) As a result, all workers gain from trade and there is no need for redistribution In fact, workers only gain when one of two national industries shuts down! The next model we will present will feature distributional effects
Gains from trade here come from two sources:
1. As before, price changes make the previously scarce good less so, allow for substitution. 2. Now, also from specializing in production that uses resources more efficiently. Caveat: for both countries to gain from trade, we need an equilibrium with complete specialization
The Ricardian model contradicts the following beliefs:
1. Trade is only good if a country can stand up to foreign competition -Gains from trade are related to comparative advantage. 2. Trade with countries that pay low wages hurts high-wage countries -Trade leads to worker dislocation, but workers can (in principle) transition to another sector with higher real income (due to lower relative price of imported good). 3. Free trade exploits less productive countries On welfare grounds they are better off
If Home has comparative advantage over Foreign in cloth, and the opportunity cost of producing cloth in terms of wine at Home is 1/2, then which of the following could be the opportunity cost of producing cloth in terms of wine in Foreign?
2/1
opportunity cost
: the opportunity cost of producing something measures the cost of not being able to produce something else
Which is necessary for a country to gain from trade in the Ricardian model
A Price changes relative to domestic autarky prices B A country must specialize in the production of one good
Which statement about the Production Possibility Frontier in the Ricardian Model studied in class is incorrect? A The Autarky PPF is linear B The world PPF is a straight line C The slope of Autarky PPF is determined by opportunity cost D The size of the labor force doesn't affect the slope of Autarky PPF
B The world PPF is a straight line
In the Ricardian model with cloth and wine discussed in class, if Home exports cloth and imports wine, then
A fall in the relative price of cloth in terms of wine will reduce Home's welfare
In the Ricardian model with cloth and wine discussed in class, if Home exports cloth and imports wine, then it must be the case that
A fall in the relative price of cloth in terms of wine will reduce Home's welfare
Because labor productivity is constant, we can define a unit labor requirement as the constant number of units of labor required to produce one unit of output
A high unit labor requirement means a low labor productivity level
In the Ricardian Model discussed in class, when Home has comparative advantage over Foreign in cloth,
A. The Autarky relative price of cloth in terms of wine is lower at Home than in Foreign B. Foreign must have comparative advantage over Home in wine
In the Ricardian Model studied in class, with countries Home and Foreign and with two goods under trade, assume aLC/ aLW <a°LC/ a°LW where aLC and aLW are unit labor requirements for cloth and wine in Home and a°LC and a°LW in Foreign. Suppose a Home-export biased catch-up occurs in Foreign, i.e. a°LC decreases. Then it is the case that:
A.The relative price of cloth (vs. food) may go down. B. The terms of trade of Home may remain unchanged.
In general equilibrium Ricardian Model with countries Home and Foreign and with two goods under trade, assume aLC/ aLW <a°LC/ a°LW where aLC and aLW are unit labor requirements for cloth and wine in Home and a°LC and a°LW in Foreign. After trade, you have been notified that the relative price ratio in world equilibrium is equal to a°LC/ a°LW. Then, it must be the case that after trade
B Home specializes in cloth production
The Ricardian PPF
Because the tradeoff is constant, the PPF is linear.
In the Ricardian model, if after Home and Foreign open to trade, suppose aLW/aLC < PW/PC < a°LW/a°LC. Then
Both countries must be completely specialized
Which of the following is not true for the two-good Ricardian model discussed in class? A The domestic production possibilities frontier is a straight line B Labor is the only input of production C The quantity of labor in a sector is fixed D All markets are competitive
C. The quantity of labor in a sector is fixed
comparative advantage
Definition: A country has a comparative advantage in producing a good if the opportunity cost of producing the good in that country is lower than it is in other countries
For the following statement, choose the best evaluation and rationale: "The Ricardian model predicts there are always gains from trade for all"
False: trade only creates gains for a country if an industry shuts down
Which is always true about gains from trade in the Ricardian model studied in class
Gains from trade only occur if prices change
Having a lower unit labor requirement in an industry means having
Higher labor productivity in an industry
In the Ricardian model, if Home has a comparative advantage in cloth rather than wine, then
Home exports cloth and imports wine
What happens when a∗LC /a∗LW > PC /PW > aLC /aLW ?
Home only wants to produce cloth: QC = L/aLC, QW = 0 Foreign only wants to produce wine: QC = 0, Q∗W = L∗/a∗LW This is called complete specialization
In the Ricardian model studied in class, a country has comparative advantage in producing a product if
Its cost of production, in terms of foregone units of the other good, is lower than that cost in the other country
In Ricardian model studied in class,
Labor can move freely across industries
Does the Ricardian model imply that it is bad to trade with low wage countries?
No, wages at home are reflective of the home country's labor productivity.
Trade in the Ricardian Model
Now Home and Foreign are allowed to trade The unit labor requirements in both countries satisfy aLC/aLW <a∗LC/a∗LW
In the Ricardian model, workers only gain from trade when
One of the two national industries shuts down
In the Ricardian model studied in class, production in Autarky is only possible where
Pc/Pw = aLC/aLw
Suppose Home exports X and imports Y. What could cause welfare for Home to go down?
Price of exports goes down
How are prices set in the Ricardian Model's autarky equilibrium?
Price ratio = unit labor cost ratio
Autarky equilibrium
Production is competitive, hence: PC = waLC PW =waLW -Workers can move freely between sectors - Only when wages are equal will workers want to produce both goods -So production of both goods can only happen where PC/PW =aLC/aLW -Notice prices = opportunity cost: the price line will sit on top of the PPF Where price line / PPF are tangent to indifference curves, economy will be in equilibrium.
Do countries export goods where their productivity is relatively high?
Ratio of US to British exports in 1951 compared to the ratio of US to British labor productivity in 26 manufacturing industries, At this time the US had an absolute advantage in all 26 industries, yet the ratio of exports was low in the least productive sectors of the US
What measures the terms of trade in Ricardian mode?
Ratio of world prices
Limitations of Ricardian Model
The model ignores distributional issues, without which it is hard to make sense of protectionism It ignores the role of other factor endowments in determining trade flows across countries It ignores the role of scale economies in determining trade flows across countries
In the Ricardian model studied in class, it is certain that a country has comparative advantage in production of a good if, when opening up to trade
The relative price of that good rises, since the cost of that good, in terms of foregone units of the other good, is higher abroad
In the Ricardian Model studied in class, with countries Home and Foreign and with two goods under trade, assume aLC/ aLW <a°LC/ a°LW where aLC and aLW are unit labor requirements for cloth and wine in Home and a°LC and a°LW in Foreign. Suppose a balanced productivity catch-up occurs in Foreign, i.e. a°LC and a°LW both decrease proportionately but a°LC/ a°LW does not change. Then it is possible that:
The terms of trade of Home can improve.
What best describes opportunity cost?
The tradeoff producers face when deciding between producing one good and another good
under autarky
Under autarky: 1. The opportunity cost of cloth in terms of wine is lower at Home than in Foreign 2. The relative price of cloth in terms of wine is lower at Home than in Foreign Home has comparative advantage in cloth
When does a country have a comparative advantage?
When it can produce a good at a lower opportunity cost
When will there be no trade in a Ricardian model?
Whenever technologies are the same in both countries
Home (England) has comparative advantage in cloth, C, (as opposed to wine, W) when world unit labor requirements are such that which equation holds?
aLW/aLC > a°LW/a°LC
Evaluate the following two statements. (1) The Ricardian model predicts wages across countries are correlated with labor productivity differences. (2) In the data there is a correlation between wages and productivity at the national level
both are true
