International Economics Lecture 2: The Ricardian Model

Transcription

1 International Economics Lecture 2: The Ricardian Model Min Hua & Yiqing Xie School of Economics Fudan University Mar. 5, 2014 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

2 Outline The Gains From Trade The Causes of International Trade Absolute and Comparative Advantage Excess Demand and International Equilibrium Absolute Advantage and Wage Distribution of Gains between Countries Summary Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

3 Gains from Trade The ability to trade (voluntarily) leads to mutual gains from trade. Point of departure: The ability to trade at any prices other than the country s autarky prices must make the country better off. The optimal direction of trade depends only on the difference between the country s autarky prices and world prices: Sell high, buy low: sell to the world what is more valuable to them than at home; buy from the world what is more costly and difficult to produce at home. Gains from trade are mutual for two countries: it is not the case that one gains at the expense of the other. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

4 Gains from Trade Figure 5.1 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

5 Gains from Exchange VS Gains from Specialization Total Gains = Gains from Exchange + Gains from Specialization Gains from exchange When two traders have similar preferences but different endowments, trade allows them to have a more diverse consumption basket or a more balanced consumption basket. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

6 Gains from Exchange VS Gains from Specialization Total Gains = Gains from Exchange + Gains from Specialization Gains from exchange When two traders have similar preferences but different endowments, trade allows them to have a more diverse consumption basket or a more balanced consumption basket. Gains from specialization Typically countries have the ability to produce different bundles of goods (the production possibility curve). Further gains can be captured by specializing in what a country is good at. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

7 Gains from Exchange VS Gains from Specialization Figure 5.2 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

8 Gains-from-Trade Theorem Free Trade VS Autarky An undistorted, competitive economy must be better off in free trade than in autarky. vector of free trade prices, p i vector of free trade outputs, Xi vector of free trade consumption, Di vector of autarky outputs, Xi a vector of autarky consumption, Di a Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

9 Gains-from-Trade Theorem Free Trade VS Autarky 1 Production efficiency in a competitive, undistorted economy p i Xi p i Xi a i i The free-trade production bundle yields a higher income at free-trade prices than the autarky bundle. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

10 Gains-from-Trade Theorem Free Trade VS Autarky 1 Production efficiency in a competitive, undistorted economy p i Xi p i Xi a i i The free-trade production bundle yields a higher income at free-trade prices than the autarky bundle. 2 Autarky market clearing and trade balance Xi a = Di a, p i Xi = i i p i D i Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

11 Gains-from-Trade Theorem Free Trade VS Autarky 1 Production efficiency in a competitive, undistorted economy p i Xi p i Xi a i i The free-trade production bundle yields a higher income at free-trade prices than the autarky bundle. 2 Autarky market clearing and trade balance Xi a = Di a, p i Xi = i i p i D i 3 Substitute (2) into (1) p i Di i i p i D a i Free trade is "Revealed Preferred" to autarky. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

12 Distribution of Gains Distribution of gains between countries (Figure 5.3) Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

13 Distribution of Gains Distribution of gains between countries (Figure 5.3) Distribution of gains within a country Heterogeneous preferences Heterogeneous endowments revisit in H-O Model Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

14 No Trade Model 1 Identical production functions in all countries 2 Same relative factor endowments in all countries 3 Constant returns to scale 4 Identical, Homogeneous preferences in all countries 5 No Distortions (imperfect competition, externalities, taxes). In this world, there would be no trade and no gains from trade. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

15 No Trade Model Figure 6.1 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

16 No Trade Model Figure 6.2 Assumptions 1-5 are sufficient for no trade, not necessary. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

17 Absolute and Comparative Advantage Ricardian Model Differences in Technology across Countries One Factor of Production: Labor (L) a special case of same relative factor endowments in all countries CRS and Perfect Competition X 1 = F (L 1 ) specifically X 1 = α 1 L 1 (1) X 2 = F (L 2 ) specifically X 2 = α 2 L 2 (2) L = L 1 + L 2 (3) Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

18 Absolute and Comparative Advantage Definition There are two countries country h and country f. Absolute Advantage the comparison of the α s for a given industry across countries α h2 > α f2 (4) defines country h as having an absolute advantage in good X 2. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

19 Absolute and Comparative Advantage Definition There are two countries country h and country f. Absolute Advantage the comparison of the α s for a given industry across countries α h2 > α f2 (4) defines country h as having an absolute advantage in good X 2. Comparative Advantage the relative productivity in the two industries across countries α h2 α h1 > α f2 α f1 (5) defines country h as having a comparative advantage in good X 2. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

20 Absolute and Comparative Advantage Proposition A pattern of comparative advantage (inequality of the productivity ratios is a necessary and a sufficient condition for gains from specialization. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

21 Absolute and Comparative Advantage Proposition A pattern of comparative advantage (inequality of the productivity ratios is a necessary and a sufficient condition for gains from specialization. Proof: (assuming comparative advantage α h2 α h1 Reallocate labor in each country toward the comparative-advantage industry. > α f2 α f1 ) dl h2 = dl h1 > 0 dl f1 = dl f2 > 0 (6) Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

22 Absolute and Comparative Advantage Proposition A pattern of comparative advantage (inequality of the productivity ratios is a necessary and a sufficient condition for gains from specialization. Proof: (assuming comparative advantage α h2 α h1 Reallocate labor in each country toward the comparative-advantage industry. > α f2 α f1 ) dl h2 = dl h1 > 0 dl f1 = dl f2 > 0 (6) The changes in the total world output of the two goods will be dx 1 = α h1 dl h2 α f1 dl f2 dx 2 = α h2 dl h2 + α f2 dl f2 (7) Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

23 Absolute and Comparative Advantage Proposition Proof: (cont d) Set the first equation in (7) to zero, reallocating labor within each country to hold world X 1 output constant, and solve for dl f2 = α h1 α f1 dl h2 dx 1 = dx h1 + dx f1 = 0 (8) Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

24 Absolute and Comparative Advantage Proposition Proof: (cont d) Set the first equation in (7) to zero, reallocating labor within each country to hold world X 1 output constant, and solve for dl f2 = α h1 α f1 dl h2 dx 1 = dx h1 + dx f1 = 0 (8) Substitute (8) into the right-hand equation of (7), replacing dl f2 with (8). [ dx 2 = α h2 α ] [ h1 αh2 α f2 dl h2 = α h1 α ] f2 dl h2 > 0 (9) α f1 α h1 α f1 Gains from specialization: X 2 increases with X 1 constant. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

25 Absolute and Comparative Advantage PPF The slopes of PPFs reflect comparative advantage. dx 1 = α 1 dl 1 dx 2 = α 2 dl 2 = α 2 dl 1 dx 2 dx 1 = α 2 α 1 The differences in slopes between two countries reflects comparative advantage. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

26 Absolute and Comparative Advantage PPF The slopes of PPFs reflect comparative advantage. dx 1 = α 1 dl 1 dx 2 = α 2 dl 2 = α 2 dl 1 dx 2 dx 1 = α 2 α 1 The differences in slopes between two countries reflects comparative advantage. The intercepts of PPFs reflect absolute advantage. The differences in intercepts between two countries reflect absolute advantage. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

27 Absolute and Comparative Advantage PPF Figure 7.1 Figure 7.2 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

28 Excess Demand and International Equilibrium Direction of Trade and Specialization Comparative Advantage predicts the direction of trade and specialization. Figure 7.3 The equilibrium autarky price ratio will be the slope of the production frontier: comparative advantage ratio Specialization and trade at p 1 Specialization and trade at p 2 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

29 Excess Demand and International Equilibrium Excess Demand (Figure 7.4) Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

30 Excess Demand and International Equilibrium International Equilibrium (Figure 7.5) Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

31 Absolute Advantage and Wage Absolute Advantage The existence of mutual gains from trade depends only on comparative advantage, not absolute advantage. One country may have an absolute advantage in everything, but it can still gain from specializing in what it does relatively well. Absolute advantage does not determine the pattern of trade or the existence of gains from trade, but it does determine real income comparisons between countries. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

32 Absolute Advantage and Wage Wage Determination Absolute Advantage in all goods higher real wage. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

33 Absolute Advantage and Wage Wage Determination Absolute Advantage in all goods higher real wage. Suppose that both countries are specialized as in Figure 7.5, and so the wage rate in each country is determined by the competitive conditions that the value of the marginal product of labor equals the wage rate. p 2α h2 = w h p 1α f1 = w f thus w h w f = p 2 α h2 p 1 α f1 (10) Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

34 Absolute Advantage and Wage Wage Determination Absolute Advantage in all goods higher real wage. Suppose that both countries are specialized as in Figure 7.5, and so the wage rate in each country is determined by the competitive conditions that the value of the marginal product of labor equals the wage rate. p 2α h2 = w h p 1α f1 = w f thus w h w f = p 2 α h2 p 1 α f1 (10) The world price ratio lies (weakly) between the autarky price ratios of the two countries. α h2 α h1 p 1 p 2 α f2 α f1 (11) Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

35 Absolute Advantage and Wage Wage Determination Assume that country h is has an absolute advantage in both goods in addition to having a comparative advantage in good 2, as in Figure 7.2. α h2 α h1 > α f1 and thus > α h2 (12) α f1 α h1 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

36 Absolute Advantage and Wage Wage Determination Assume that country h is has an absolute advantage in both goods in addition to having a comparative advantage in good 2, as in Figure 7.2. α h2 α h1 > α f1 and thus > α h2 (12) α f1 α h1 We can then add an element to the left-hand side of the chain of inequalities in (11) using (12). α h2 α f1 > α h2 α h1 p 1 p 2 α f2 p 2 α h2 α f1 p > 1 (13) 1 α f1 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

37 Absolute Advantage and Wage Wage Determination Assume that country h is has an absolute advantage in both goods in addition to having a comparative advantage in good 2, as in Figure 7.2. α h2 α h1 > α f1 and thus > α h2 (12) α f1 α h1 We can then add an element to the left-hand side of the chain of inequalities in (11) using (12). α h2 α f1 > α h2 α h1 p 1 p 2 α f2 p 2 α h2 α f1 p > 1 (13) 1 α f1 The right-hand expression is, from (10), the ratio of the wage rates in the two countries. p 2 α h2 = w h > 1 (14) α f1 w f p 1 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

38 Absolute Advantage and Wage Absolute advantage shows up in real wage comparisons between countries. The more productive country will have the higher real wage. If wages are market determined, a high wage is the result of high productivity, and is not a deterrent to gains from trade. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

39 Absolute Advantage and Wage: Empirical Evidence Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

40 Absolute Advantage and Wage: Empirical Evidence Wages versus value added: data from Table 7.1 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

41 Distribution of Gains between Countries Small Countries are the bigger gainers. (1) Begin with the equilibrium in Figure 7.5. Figure 7.5 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

42 Distribution of Gains between Countries Small Countries are the bigger gainers. (2) Let country f grow: it s production frontier shifts out. Figure 7.6 Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

43 Distribution of Gains between Countries Small Countries are the bigger gainers. Figure 7.7 (3) Country f desires to trade more at any given price ratio. But this cannot be an equilibrium because there is no change in h. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

44 Distribution of Gains between Countries Small Countries are the bigger gainers. Figure 7.8 (4) To re-establish equilibrium, the price of country f s export must fall, the price of its import must rise. (5) Country h gains more, may get all gains, Figure 7.8. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32

45 Summary With international differences in production technology, there will exist gains from trade. Countries should specialize according to comparative advantage, their relative ability to produce different goods. If a country is uniformly more productive (e.g., has an absolute advantage in everything), then it must have a higher real wage. Theory suggests that small countries are major gainers from trade: technically, they trade further away from their autarky prices than large countries. Min Hua & Yiqing Xie (Fudan University) Int l Econ - Ricardian Mar. 5, / 32