Ricardian Model. Seyed Ali Madanizadeh. April Sharif U. of Tech. Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

Transcription

1 Ricardian Model Seyed Ali Madanizadeh Sharif U. of Tech. April 2014 Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

2 Outline Introduction Ricardian Model setup Autarky and free trade Budget constraints Comparative Advantage Autarky solution Free trade solution Gains from trade Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

3 Introduction Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

4 Introduction Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

5 Introduction Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

6 Introduction Borders are more open now than they have ever been before. 1st Globalization: pre-wwi increase in trade; ended w/ WWI. 2nd Globalization: started in the 1990s, w/ the end of the cold war; still continues. But why are people troubled? Why do we see mass protests in WTO, WB and IMF meetings? Are there gains from trade? Don t these people like it? Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

7 Model Two countries: N(orth), S(outh) : say US and China,... Two commodities: C(omputer), T(extile) Identical preferences: One immobile factor: Labor U (C, T ) = log (C ) + 3 log (T ) Labor force N 200 S 1000 Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

8 Labor Requirement CRS prodution: Labour required to produce one unit of... a T a C N labor required 4 4 S labor required 5 10 Perfect competition Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

9 Absolute advantage The N has absolute advantage for both goods: it s more productive in producing either good (less labor required). So, why would it ever import anything from the S? Let s start w/ autarky and move to free trade. Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

10 Comparative advantage Opportunity costs T relative to C C relative to T N S 2 2 N has comparative advantage in producing C. It produces C relatively more cheaply. S has comparative advantage in producing T. It produces T relatively more cheaply. Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

11 Trade and specialization We ll assume the law of one price holds: identical goods in different location should have the same price if there are no trade barriers no tariffs, quotas, transaction costs, etc. Let P T = world price of Textile, = world price of Computer. The North and South take the world prices as given. Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

12 Trade and specialization North s Choice one unit of North labor can produce: 1 4 unit of Textile worth P T unit of Computer worth 4 North will specialize in Textile if P T Computers vice versa. North prduce both goods if P T = 1. 4 > 4 or P T > 1 and specialize in Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

13 Trade and specialization South s Choice one unit of South labor can produce: 1 5 unit of Textile worth P T unit of Computer worth 10. South will specialize in Textile if P T in Computers vice versa. South prduce both goods if P T = > 10 or P T > 1 2 and specialize Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

14 Trade and specialization If 0 < P T trade = 1 2 < 1 2 both North and South specialize in Computers. No If P T North specializes in Computers and South produces both goods. Trade. If 1 2 < P T < 1 North specializes in Computers and South specializes in Textiles. Trade. If P T = 1 North produces both goods and South specializes in Textile Trade. If 1 < P T both North and South specialize in Textiles. No trade Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

15 Autarky PPF North in Autarky Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

16 Budget constraint in free trade North in trade Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

17 Autarky PPF South in Autarky Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

18 Budget constraint in free trade South in trade Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

19 Autarky Solution max log (C ) + 3 log (T ) C,T s.t. C = L C a C T = L T a T L = L C + L T Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

20 Free Trade solution Assume 1 2 < P T < 1 North specialzies in Computers. It produces = 50 computers. North s income = 50 South specializes in Textile. It produces = 200 Textiles South s income = 200P T Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

21 Free Trade solution Problem (I = Income): max log (C ) + 3 log (T ) C,T FOCs s.t. C + P T T = I C = 1 4 I P T T = 3 4 I Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

22 Free Trade solution North: C N = T N = P T South: C S = P T T S = Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

23 Free Trade solution Market Clearing It is confirmed that: 1 2 < P T < 1 C N + C S = 50 T N + T S = P T = 50 P T = 0.75 Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24

24 Free Trade solution C N = 12.5 C S = 37.5 T N = 50 T S = 150 P T = 0.75 Seyed Ali Madanizadeh (Sharif U. of Tech.) Ricardian Model April / 24