Comparative Advantage

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Topics: Economics
Chapter 2 Labor Productivity and Comparative Advantage: The Ricardian Model

Chapter Organization
§ § § § § § § § §
Introduction The Concept of Comparative Advantage A One-Factor Economy Trade in a One-Factor World Misconceptions About Comparative Advantage Comparative Advantage with Many Goods Adding Transport Costs and Nontraded Goods Empirical Evidence on the Ricardian Model Summary
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Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy Sixth Edition Policy, by Paul R. Krugman and Maurice Obstfeld

Copyright © 2003 Pearson Education, Inc.

Introduction
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Countries engage in international trade for two basic reasons:

The Concept of Comparative Advantage
§ §
On Valentine’s Day the U.S. demand for roses is about 10 million roses. Growing roses in the U.S. in the winter is difficult.

• They are different from each other in terms of climate, land, capital, labor, and technology.

• They try to achieve scale economies in production.

§

The Ricardian model is based on technological differences across countries.

• Heated greenhouses should be used. • The costs for energy, capital, and labor are substantial.

• These technological differences are reflected in differences in the productivity of labor.

§
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Resources for the production of roses could be used to produce other goods, say computers.
Slide 2- 4

Copyright © 2003 Pearson Education, Inc.

Copyright © 2003 Pearson Education, Inc.

The Concept of Comparative Advantage
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Opportunity Cost

The Concept of Comparative Advantage
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The principle of comparative advantage: • If each country exports the goods in which it has comparative advantage (lower opportunity costs), then all countries can in principle gain from trade.

• 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.

§

Comparative Advantage

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