Lbor Productivity nd omrtive Advntge: The Ricrdin Model of Interntionl Trde Model of trde with simle (unrelistic) ssumtions. Among them: erfect cometition; one reresenttive consumer; no trnsction costs, no trde brriers Results: countries trde becuse they re different from ech other: ech roduces the good or services tht it does reltively well; even the lest efficient roducing country find n dvntge to trde. Two different fmilies of trde determinnts Trde Differences Similrities Technologies Fctor Endowments Economies of Scle Ricrdo Hecksher- Ohlin Krugmn Gin from trde bsed on differences: gins from seciliztion. A country gins when it secilized in its most roductive sector; bsed on similrities: gins from economies of scles. Ech country roduces only limited rnge of goods, it cn roduce ech of these goods more efficiently thn if it tried to roduce everything. Emiricl Results: both tyes of determinnts exist bsed on differences: more relevnt for North- South trde flows; bsed on similrities: more relevnt for North- North trde it is esier to study both tye of models within two different models rther thn unifying both roch
The concet of comrtive dvntges omrtive dvntge exists when country hs n bsolute or reltive sueriority in the roduction of good or service i.e. where the oortunity cost of roduction is lower. oortunity costs describe trde-offs. In order to roduce more of one good, country must retrieve resources from other sectors. The oortunity cost of good 1 in terms of good 2 is the number of good 2 tht could hve been roduced with the resources used to roduce given number of good 1. Exmle: bsolute comrtive dvntge A country is sid to hve the bsolute dvntge in roduction if it cn roduce the sme mount of outut with less inut reltive to other countries. Switzerlnd One unit of wine 5 lbor hrs One unit of cheese 2 lbor hrs Frnce 3 lbor hrs 6 lbor hrs Frnce hs n bsolute dvntge in the roduction nd Switzerlnd hs n bsolute dvntge in the roduction Frnce should secilized in.. Switzerlnd should secilized in.. hy Frnce nd Switzerlnd end u roducing the goods in which they hve comrtive dvntges? ill trde mke both country better-off? The Ricrdin Model
Hyothesis: one fctor of roduction: Lbor (L). Immobile cross countries, mobile between sectors only two goods, wine nd cheese; erfect cometition. Firms do not ffect mrket rices; two identicl countries in term of size, home nd foreign () BUT different technologies Technology summrized by lbor roductivity in ech industry exressed in term of inut fctor requirement: the number of hour of lbor to roduce ound of cheese () or gllon of wine (Lw). Economy totl resources re defined s L: the totl lbor suly Lbor Productivity: quntity of outut tht cn be roduced with unit of lbor. since reresents hours of lbor needed to roduce one ound of cheese, its recirocl, 1/, reresents the lbor roductivity of cheese roduction in secific country. Similrly, 1/, reresents the lbor roductivity of wine roduction in this country. Production Possibilities: limited resources to roduce one good. Amount of good deends on L; trde-off: to roduce more of one good the economy scrifices some roduction of the other goods; Trde-off is reresented by roduction ossibility frontier: mximum mount of good tht cn be roduced once the decision hs been mde to roduce ny given mount of the other goods. Qc is the mount of cheese roduced, Qw is the mount of wine roduced Qc is the mount of lbor used in roducing cheese nd Qw is the mount of lbor used in roducing cheese, so tht the technicl constrint is : Q + Q L
Q Q + L Q L Q Sloe of the roduction ossibility frontier Reltive Prices nd Suly Assume Pc nd Pw be the rice of cheese nd wine resectively ; it tkes erson-hours to roduce ound of cheese nd erson-hours to roduce ound of wine. Assume erfect cometition with one fctor of roduction: Lbor; lbor move to the sector tht ys the higher wge; so tht hourly wge in the cheese sector will equl the vlue of wht worker cn roduce in n hour. Profit : Revenu - ost = Q w Q = 0 w = Sme for the wine sector. ges in the cheese sector will be higher if > ges in the wine sector will be higher if In Autrky (bsence of trde), the reltive rices of goods re equl to their reltive unit lbor requirement
ountry seciliztion (it devotes ll it resources in one sector) The economy secilized in the roduction of cheese if > it secilized in the roduction of wine if it secilized in the roduction of both goods if = A country secilizes in the roduction of one rticulr good if its reltive rice exceeds its oortunity cost Trde Two countries: home (Frnce) nd foreign (Switzerlnd) which will lwys denoted by the suerscrit ; ssume tht foreign is more roductive in wine thn in cheese thus: or Home hs comrtive dvntge in cheese nd exorts its reltive cheer cheese in the foreign country; foreign hs comrtive dvntge in wine nd exort wine; this is the reltive dvntge nd not the bsolute dvntge tht determines trde. A numericl exmle A country hs reltive dvntge in the roduction of good if it cn roduce tht good t lower oortunity cost reltive to nother country Suose one country hs n bsolute dvntge in the roduction of both goods. Even in this cse ech country will hve comrtive dvntge in the roduction of one of the goods Switzerlnd Frnce One unit of wine 4 lbor hrs 5 lbor hrs One unit of cheese 2 lbor hrs 15 lbor hrs
Switz. Frnce One unit of wine 4 lbor hrs 5 lbor hrs One unit of cheese 2 lbor hrs 15 lbor hrs In Switzerlnd, in order to roduce one more unit of wine, resources must be ulled from their next best use : cheese roduction. Secificlly, 1 unit of wine will require the scrifice of 2 units of cheese since 1 unit of wine requires 4 hours of lbor inut tht must be drwn from cheese roduction. Pulling 4 lbor hours wy from cheese, mens giving u the roduction of 2 units of cheese (ech 'kilo' of cheese requiring 2 lbor hours). This scrifice of cheese reresents the oortunity "cost" of roducing ech dditionl unit of rice. Thus in the cse of Switz. 1 unit of wine will "cost" 2.0 units of cheese 1 unit of cheese will "cost" 0.5 unit of wine The cse of Frnce 1 unit of cheese will "cost" 3.0 units of wine 1 unit of wine will "cost" 0.333 unit of cheese Foreign needs to give u mny more units of wine to roduce one more unit of cheese Becuse foreign country s reltive unit lbor requirement in cheese is higher thn Home s, its roduction ossibility frontier is steeer. Reltive rices fter trde home exorts its reltive cheer cheese in the foreign country nd imort wine; foreign exort its reltive che wine in the home country nd imort cheese This is rofitble s long s there re reltive rice differences; omre utrky nd free-trde. In utrky both goods re roduced, wges re equlized between sectors w = w w = = = w = reltive rice = oortunity cost
orld Trde Price? Free Trde One useful wy to kee trck of two mrkets t once is to focus not just on the quntities of cheese nd wine sulied nd demnded but lso on the reltive suly nd demnd d Reltive Demnd: decreses with d Reltive Suly more difficult. 3 ses Assume tht home hs comrtive dvntge in the cheese roduction se 1 Home nd foreign secilize in wine; No world suly of cheese below this threshold se 2 = The reltive rice of cheese is exctly equl to the threshold vlue. orkers t home ern exctly the sme wge in both sector. Home suly ny reltive quntities of the two goods; Foreign roduce only wine. The reltive suly curve is flt.
se 3 The reltive free trde rice of cheese is between both utrky rices. orkers t home ern more in the cheese sector. Home secilizes in the L cheese roduction. Home roduction of cheese: Q = Foreign roduce only wine: L Q = Summry Equilibrium rice fter trde between both utrky rice ech country secilizes ccording to its comrtive dvntge; Equilibrium rice fter trde equl home (foreign) oortunity cost home (foreign) secilizes ccording to its comrtive dvntge; Equilibrium rices re determined by reltive suly nd demnd; orkers move freely between sectors ccording to their wges. Gin from trde. Methodology 1: Grhics Trde is indirect method of roduction: home could roduce wine directly but trde llows home to roduce cheese nd exchnge it through trde with the foreign country This indirect method of roduction is efficient becuse ech country secilizes in the roduction of good where it hs comrtive dvntge
Gin from trde. Methodology 2: omre utrky nd free trde Autrky: hourly roduction is 1/ unit of wine; Alterntively under free trde: home could use this hour to roduce 1/ unit of cheese, which could be exchnged for wine so tht the originl hour of lbor yields 1 This will be beneficil s long s 1 1 > or > Gin from trde. Numericl exmle. heese Home = 1 ine = 2 Foreign = 6 = 3 Autrky: home: oortunity cost of cheese is ½ unit of wine; Foreign oortunity cost of cheese is 2 units of wine; 1 Trde: ssume = 1 2 2 Home secilizes in cheese Foreign secilizes in wine Pttern of seciliztion roduces gin from trde direct roduction of wine: 1 hour of Home lbor roduces only ½ unit of wine; indirect roduction of wine: 1 hour of Home lbor roduce 1 unit of cheese, which cn be trded for 1 unit of wine. Similr for Foreign Differences between countries technologies roduce the gin from trde if = = : no gin from trde only one country gins if the reltive rices do not chnge fter trde
Reltive wges. Home secilizes in cheese. All workers re emloyed in cheese nd ern 1 unit of cheese er hour of lbor; Foreign workers roduce only wine nd ern 1/3 unit of wine er hour of lbor; Assume rice of 1 unit of wine=rice of one unit of cheese=12 : Home workers ern 12 /h; foreign workers ern 4 /h; reltive wge of Home workers = 3 (12/4). Does not deend on the rices of wine nd cheese. Home workers ern three times more thn foreign workers. This rtio lies between both utrky roductivities This is recisely why country ends u with cost dvntge in one good. Home is 6 times s roductive s Foreign in cheese, but only 1,5 times s roductive in wine; Home ends u with wge rte three times s high s Foreign s. Becuse of its lower wge rte, Foreign hs cost dvntge in wine, even though it hs lower roductivity. Home hs cost dvntge in cheese, desite its higher wge rte, becuse the higher wge is more thn offset by its higher roductivity Productivity nd cometitiveness. gins from trde deend on comrtive rther thn bsolute dvntge in roductivity; An bsolute dvntge in roducing good is neither necessry nor sufficient condition to yield cometitive dvntge; The cometitive dvntge of n industry deends not only on its roductivity reltive to the foreign industry, but lso on the domestic wge rte reltive to the foreign wge rte (see numericl exmle).
Productivity nd wges. e ssumed tht the reltive wge of the two countries reflects their reltive roductivity. ht is the evidence? If wge were exctly roortionl to roductivity. All oints in the grh would lie long the 45 line. in the rel world, ntionl wges rtes reflect differences in roductivity; Differences in roductivity revel overty nd income inequlity Difference in roductivity Eductionl olicies Humn citl stock Technologies Institutions ould countries secilize in the wrong sector? Indi nd UK in the 19th century Is comrtive dvntge bsed on low wge unfir? Puer lbor rgument. Foreign cometition is unfir nd hurts other countries when it is bsed on low wges. Is it true? Our numericl exmle: Home is more roductive thn Foreign in both industries, nd Foreign s lower cost of wine roduction is entirely due to its much lower wge rte; Foreign s lower wge rte is irrelevnt to the question of whether Home gins from trde (lower cost of wine roduced in Foreign is either due to high roductivity or low wges, does not mtter to Home); All tht mtters to Home is tht it is cheer in terms of its own lbor for Home to roduce cheese nd trde it for wine thn to roduce wine for itself.
Exloittion. Trde mkes country worse off if its workers receive much lower wges thn workers in other ntions. Is it true? Our numericl exmle: Foreign workers re id much less thn Home workers. if Foreign refused trde with Home, rel wges would be even lower: the urchsing ower of worker s hourly wge would fll from 1/3 to 1/6 unit of cheese. omrtive dvntges with mny goods. Technology of ech country cn be described by its unit lbor requirement for ech good i [ 1, N ] t Home [ 1, N ] in foreign country lssify goods ccording to their reltive roductivity. Trick: clculte the rtio of Home s unit lbor requirement to Foreign s. L1 L1 L2 L2... LN LN Reltive wges nd seciliztion. Let w be the wge rte er hour in Home nd w be the wge rte in Foreign. The rtio of wge rtes is then w/w; Goods will lwys be roduced where it is cheest to mke them: w t Home for instnce if: w w > w in Foreign if: w w > w w
Good 1 Good 2 Good 3 L1 L1 L2 L2 Produced in Home L3 L3 w w L4 L4 Produced in Foreign LN LN wge rtes rtio determines countries seciliztion; All the goods to the left of the cut end u being roduced in Home; ll the goods to the right end u being roduced in Foreign. Good Home Foreign Reltive Home roductivity dvntges Ale LA = 1 LA = 10 LA LA = 10 Bnns LB = 5 LB = 40 LA LA = 8 vir = 3 = 12 LA LA = 4 Dtes LD = 6 LD = 12 LA LA = 2 Enchilds LE = 12 LE = 9 LA LA = 0.75 If Home wge rte is five times tht of Foreign ( rtio of Home wge to Foreign wge of five to one), les nd bnns will be roduced in Home nd cvir, dtes, nd enchilds in Foreign. If the Home wge rte is three times tht of Foreign, Home roduce les, bnns, nd cvir, while Foreign roduce dtes nd enchilds. Reltive wges in the multi-goods model No direct demnd on the rt of consumers derived demnd. The reltive derived demnd for Home lbor will fll when the rtio of Home to Foreign wges rises, for two resons: 1. As Home lbor becomes more exensive reltive to Foreign lbor, goods roduced in Home lso become reltively more exensive, nd world demnd for these goods flls. 2. As Home wges rise, fewer goods will be roduced in Home nd more in Foreign, further reducing the demnd for Home lbor. exlin the steed she of RD Equilibrium deends on the size of the economy
Trnsort costs nd non-trded goods orld economy described by the Ricrdin model is mrked by very extreme interntionl seciliztion. ountries might lso roduce the good tht they imort: existence of more thn one fctor of roduction reduces the tendency seciliztion; countries sometimes rotect industries from foreign cometition; It is costly to trnsort goods nd services, nd in some cses the cost is enough to led countries into self-sufficiency in certin sectors. Non-trded good with trnsort costs Some goods re non-trded Trnsction costs mtter: Anderson nd vn incoo (2004) Trnsction costs re lrge: Totl trde costs in rich countries re lrge tx equivlent is bout 170%: 55% locl distribution costs; 44% border relted; bout 74% trde costs (1,21 x 1,44 = 1,74) 21% trnsorttion costs. Exmle: Mttel s Brbie doll: roduction costs=1$; Price=10$ Differences: trnsorttion costs, distribution costs, mrketing costs In this exmle: triffs equivlent= 900 %. Trnsort costs hve imortnt imliction for develoing countries: Ricrdo: Emiricl Evidence I higher reltive roductivity in the U.S. industry U.S. exort more in tht industry thn UK; hving high roductivity in n industry comred with foreigners is not enough to ensure tht country will exort tht industry s roducts; the reltive roductivity must be high comred with reltive roductivity in other sectors; in generl, U.S. exorts were lrger thn U.K. exorts only in industries where the U.S. roductivity dvntge ws somewht more thn two to one.
Ricrdo: Emiricl Evidence II Golub et Hseih (2000): recent emiricl test. Find tht 1% increse in US reltive roductivity leds to β% increse in reltive exort Exort US Exort ountry i = α + βln Lbor Productivity US Lbor Productivity ountry i Jn Germny UK β 0.33 0.19 0.09 t-vlue 3 4.3 2.8 Low R²: other determinnts might be relevnt nd imortnt