Krugman_PPT_ch03 2010 p1.pdfVIP

Chapter 3 Labor Productivity and Comparative Advantage: The Ricardian Model Slides prepared by Thomas Bishop Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Preview Opportunity costs and comparative advantage 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 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-2 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, labor skills, physical capital, natural resources, and technology create productive advantages for countries. Economies of scale (a larger scale is more efficient) create productive advantages for countries. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-3 Introduction (cont.) The Ricardian model (chapter 3) says differences in the 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, land, or other factors of production between countries cause productive differences, leading to gains from trade. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 3-4 Comparative Advantage and Opportunity Cost The Ricardian model uses t