Chapter 3 Ricardian model
1 Chapter 3 Ricardian Model
Ricardian model Opportunity costs and comparative advantage An Example Relative demand-relative supply analysis a one factor ricardian model Production possibilities Gains from trade · Wages and trade Misconceptions about comparative advantage Transportation costs and non-traded goods Empirical evidence
2 Ricardian Model • Opportunity costs and comparative advantage • An Example • Relative demand-relative supply analysis • A one factor Ricardian model • Production possibilities • Gains from trade • Wages and trade • Misconceptions about comparative advantage • Transportation costs and non-traded goods • Empirical evidence
Introduction Theories of why trade occurs can be grouped into three categories Market size and distance between markets determine how much countries buy and sell. These transactions benefit both buyers and sellers Differences in labor, physical capital, natural resources and technology create productive advantages for countries Economies of scale(larger is more efficient) create productive advantages for countries
3 Introduction • Theories of why trade occurs can be grouped into three categories: • Market size and distance between markets determine how much countries buy and sell. These transactions benefit both buyers and sellers. • Differences in labor, physical capital, natural resources and technology create productive advantages for countries. • Economies of scale (larger is more efficient) create productive advantages for countries
Introduction(cont The Ricardian model ( chapter 3 says differences in productivity of labor between countries cause productive differences, leading to gains from trade Differences in productivity are usually explained by differences in technology The Heckscher-Ohlin model(chapter 4)says differences in labor, labor skills, physical capital and land between countries cause productive diferences, leading to gains from trade
4 Introduction (cont.) • The Ricardian model (chapter 3) says differences in productivity of labor between countries cause productive differences, leading to gains from trade. – Differences in productivity are usually explained by differences in technology. • The Heckscher-Ohlin model (chapter 4) says differences in labor, labor skills, physical capital and land between countries cause productive differences, leading to gains from trade
Comparative Advantage and Opportunity Cost The ricardian model uses the concepts of opportunity cost and comparative advantage The opportunity cost of producing something measures the cost of not being able to produce something else
5 Comparative Advantage and Opportunity Cost • The Ricardian model uses the concepts of opportunity cost and comparative advantage. • The opportunity cost of producing something measures the cost of not being able to produce something else