FREC 810 International Ag. Trade

Transcription

1 FREC 810 International Ag. Trade Dr. Titus Awokuse 207 Townsend Hall Tel: ; Fax: (Ricardian Model) 2! David Ricardo proposed the theory of C.A. Ricardian Law of Comp. Advantage: A country has C.A. in the production a good if the Opportunity Cost (OC) or the Marginal Cost (MC) of producing that good in terms of other goods is lower in that country than in other countries. Principle of! Gains from trade if:! A nation exports goods in which it has greatest C.A.! A nation imports goods in which it has the least C.A

2 Opportunity Cost! Trade-offs/Choices: Cost of what you choose to have in terms of what you! Fresh Roses in February "Grown in greenhouses at high cost "Cheaper thru int l trade with S. America "Opportunity cost of imports: some US jobs Computers or Roses Choice: 1 million Roses OR 10,000 Computers "O.C. of 1 mil. Roses is 10,000 Computers "O.C. of 10,000 Computers is 1 mil. Roses "O.C. of producing Roses (in terms of computers) in S.America will be less than in USA Differences in O.C offers basis for mutually trade among nations 5 6 What s Basis for Trade?! Differences in relative prices (i.e. O.C) reflects each nation s C.A. and forms the basis for trade Main Assumptions of Ricardian Model:! 2 countries 2 commodities 1 Factor of prodn! Constant! Perfect mobility of resources w/in nations, but immobility between nations! Zero transportation cost! Perfect competition prevails in all factor and product! Consumer tastes and preferences is ignored "Focus only on production side, not consumption 7 8 2

3 Implications of Assumptions! Complete specialization of both nations in the product in which they have a C.A.! Only the potential range of can be determined not specific terms of trade (TOT) Basis for Trade?! Differences in relative prices (i.e. O.C) reflects each nation s C.A. and! Production levels can be determined, but not the level of trade or consumption of either of the two commodities 9 10 One Factor Economy! Labor is the ONLY factor of production! Labor productivity is expressed in terms of: unit labor requirement! Differences in labor productivity is viewed as basis for comparative advantage! Assume "2 countries: US and France "2 commodities: Wine and Cheese "One factor of production Labor Only! 11 Unit Labor Requirement! Definition:! Is the # of hours of labor required to produce a gallon of wine (or pound of cheese)! Example: Wine: 1 hour of labor per gallon (a LW ) Cheese: 2 hours of labor per pound (a LC ) 12 3

4 Production Possibilities Frontier (PPF)! Scarce resources implies trade-offs: " can produce more W if less C is produced! shows the various possible combination of the 2 commodities that can be produced Production Possibilities Frontier! PPF is a straight line if: only one Factor "Wine and Chesse production: Q W ; Q C! PPF line equation: a LW Q W + a LC Q C = L : Review What is the Ricardian Law of Comparative Advantage? What is the basis for trade? Opportunity Cost: Review! Since PPF is a straight line: "O.C of a gallon of wine in terms of cheese is constant! Recall: O.C of Cheese is the # of gallons of Wine the economy give up to produce an extra pound of cheese "O.C. of C is: a LC / a LW! 1 lb. of C cost: a LC person-hours! 1 gal. of W cost: a LW person-hours

5 Opportunity Cost! EXAMPLE:! Let 1 lb. of C cost: a LC = 1! Let 1 gal. of W cost: a LW = 2! Then, O.C. of C is: a LC / a LW =1/2! Then, O.C. of W is: a LW / a LC = 2 Who Trades in What?! The ratio of the unit labor req. determines who has " Country with lower unit labor req. in producing a commodity has comparative advantage in that commodity Who Trades in What?! Ratio of the unit labor req (Same as Opport. Cost): a LC(us) /a LW(us) < a LC(France) /a LW(France) Who Trades in What? Numerical Example US France Cheese a LC = 1 a LC = 6 Wine a LW = 2 a LW = 3 O.C. C a LC /a LW = 1/2 a LC /a LW = 6/3 O.C. w a LW / a LC = 2 a LW / a LC = 3/6! : "US more productive in C than France! US has C.A. in production and export of C "France more productive in W than US "France has C.A. in production and! US has lower unit labor req. " Higher labor productivity! Relative price of C (P c /P w ): " Range b/w O.C. of C in both nations! US specialize in production and export of C! France specialize in production and export of W

6 Conclusion! One Factor Economy - Labor only! Differences in is viewed as basis for comparative advantage! This is only a partial explanation " Other basis for trade (ignored by Ricardo s model) is differences in countries resource endowments " E.g. Canada X lumber to US not b/c of higher productivity but b/c they have more forest land per capita " Weakness: Exclusion of role of resource endowment " We can improve Ricardian Model by allowing for other factors such as (K, land, and mineral resources)