Transcript Comparative advantage

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;
 Charles van Marrewijk, 2012; 1
Comparative advantage (technology differences)
International trade based on differences in technology
• 2 countries; A and B
• 2 goods; X and Y
• 1 factor of production; labor L
assumptions
• Constant returns to scale; CRS
• Labor mobility between sectors, not between countries
• Perfect competition
• No transport costs
unit labor requirement = units of labor required to produce one
unit of a final good. By assumption this is independent of the
number of laborers active in a sector (CRS), but may differ between
the two countries.
Let ax be the unit labor requirement for good X in country A, etc
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;
 Charles van Marrewijk, 2012; 2
Comparative advantage (technology differences)
We can make a table to summarize the state of technology
good X
good Y
country A
ax
=6
ay
=4
country B
bx
=2
by
=3
To be concrete we put some actual numbers in the table
Note that country B is more efficient than country A; it uses less
labor to produce 1 unit of good X and it uses less labor to produce 1
unit of good Y. Why on earth would it trade with country A?
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;
 Charles van Marrewijk, 2012; 3
Comparative advantage (technology differences)
Recall the productivity table
good X
good Y
country A
ax
=6
ay
=4
country B
bx
=2
by
=3
First we derive the production possibility frontiers
Assume that country A has 600 laborers and country B has 300
Country A can produce 600/6 = 100 of X;
Country B can produce 300/2 = 150 of X;
or 600/4 = 150 of Y
or 300/3 = 100 of Y
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;
 Charles van Marrewijk, 2012; 4
Comparative advantage (technology differences)
Country A can thus produce at most 100 X or 150 Y
If 12 Labor is moved from Y to X country A produces
Y
3 less Y and 2 more X; independent of the initial point
150
Country A’s ppf is thus a straight line
A
(because of CRS and 1 factor of production)
Similarly for country B
100
B
0
100
150
X
Suppose that consumers in country A and in country B always want
to consume at least some of both goods
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;
 Charles van Marrewijk, 2012; 5
Comparative advantage (technology differences)
In autarky (without trade) country A might produce and consume
At point A, country B at point B
Y
Note that if country A wanted to change its
consumption point it would have to move
along its own ppf.
A
If A wants to consume more X it
has to give up 6/4 = 1.5 units of Y
A’s opportunity cost of X is 1.5 Y
B
X
0
If B wants to consume more X it has to give up 2/3 = 0.66 of Y
B’s opportunity cost of X is only 0.66 Y
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;
 Charles van Marrewijk, 2012; 6
Comparative advantage (technology differences)
The opportunity cost differences are evident from the table
good X
good Y
country A
ax
=6
ay
=4
ax/ay = 1.5
country B
bx
=2
by
=3
bx/by = .66
If A wants to consume 1 more X it needs ax labor. These have to
come from sector Y, where ax labor could have produced ax/ay of Y
Similarly, for B the opportunity cost of X is bx/by of Y
Good X is relatively expensive in country A if its opportunity cost in
terms of Y are larger than in B, i.e. if ax/ay > bx/by
For country B this implies that the opportunity cost of X is low
relative to country A: Country B has a comparative advantage in X
For country A the opportunity cost of Y in terms of X is low relative
to country B:
Country A has a comparative advantage in Y
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;
 Charles van Marrewijk, 2012; 7
Comparative advantage (technology differences)
The differences in opportunity costs give rise to gains from trade
If A specializes in the production of X and B in the production of Y
They may trade with each other, say at px/py = 0.90
Y
Say A wants to buy 40 X. It has to pay 36 Y
And might produce at Apr and consume at Ac
Apr
Provided B is willing to demand 36 Y
Ac
A
In exchange for 40 X.
That is the trade triangles
have to coincide
Bc
Both countries gain: they
consume more after trade
B
0
Bpr
X