Trade & Ricardian Model (the Concept of Comparative Advantage)

Trade & Ricardian Model (the Concept of Comparative Advantage)

Although Smith’s ideas about absolute advantage were crucial for the early development of classical thought for international trade, it is generally agreed that David Ricardo (1772-1823) is the creator of the classical theory of international trade, even though many concrete ideas about trade existed before his Principles of Political Economy and Taxation (Ricardo, 1817). Ricardo showed that the potential gains from trade are far greater than Smith envisioned in the concept of absolute advantage.

The reason trade occurs is because countries are different from each other. Those differences offer opportunities for trade to be mutually beneficial between trading partners. On the one hand, consumers of imported goods benefit because the goods may not be available domestically, or imports may be cheaper than domestic equivalent goods, or because imports have characteristics that are appealing. Alternatively, producers export goods because they profit from exporting.

Which goods should such a country export and which goods should they import? In a nutshell, a country exports those goods which it can produce more cheaply compared to other countries. Equivalently, a country imports those goods whose purchase prices abroad are less than their domestic cost of production. The main question is how to measure costs.

Table 1 presents the amounts of labor required to produce two goods, wine and cloth, for two countries, Portugal and England. Note that Portugal has the absolute advantage in production of both wine and cloth. In other words, labor in Portugal can produce both wine and cloth with less labor than England. It takes 80 hours of Portuguese labor to produce a barrel of wine, which is less than the 120 hours required in England. In the same fashion Table 1 shows that Portuguese labor is also more productive in the production of cloth, requiring 10 hours less per yard than English labor.

Table 1

	Wine	Cloth
Portugal	80 hrs/bbl	90 hrs/yd
England	120 hrs/bbl	100 hrs/yd

Is there the possibility of mutually beneficial trade since Portugal can produce both goods more cheaply than England? The answer is surprisingly “yes.” To see how this can be the case, we need to calculate the opportunity costs of producing cloth and wine for both countries. In essence, how much of one good is given up if labor is devoted to the production of the other?

We can calculate these opportunity costs by asking how much of one good could have been produced if we divert from producing a unit of the other. For example a yard of cloth costs 100 hrs. to produce in England. If we divert those 100 hours to the production of wine, we could have produced 5/6 barrel.

(100hours/yd) /(120 hrs/bbl) = 10/12 bbl/yd or 5/6 bbl/yd

What this means is that for every yard of cloth produced in England it is giving up a little less than a barrel of wine.

The labor cost of a unit of cloth in Portugal is 90 hours per yard. Since it only costs 80 hours per barrel of wine, the Portuguese give up 9/8 barrel of wine for each yard of cloth.

(90 hours/yd) / (80 hrs/bbl) = 9/8 bbl/yd or 1& 1/8 bbl/yd

In this case for each yard of cloth produced by Portugal it gives up a little more than a barrel of wine.

We can calculate the opportunity costs of wine for both countries in the same manner. These opportunity costs are given in Table 2.

Table 2

	Wine	Cloth
Portugal	8/9 yd cloth/barrel wine	9/8 barrel wine /yd cloth
England	6/5 yd cloth/barrel wine	5/6 barrel wine /yd cloth

To determine the patterns of trade between the two countries, we need to compare their respective opportunity costs of producing the two goods. A country will have a comparative advantage in the production of a good if it has the lower opportunity cost as compared to its trading partner. England has the comparative advantage in the production of cloth since its opportunity cost 5/6 barrel of wine as compared to Portugal’s 9/8 barrel of wine.

Note that the opportunity cost of one good is the reciprocal of the opportunity cost of the other good. Therefore, if England has the lower opportunity cost of producing cloth, then Portugal must necessarily have the lower opportunity cost of producing wine.

In a no-trade situation, termed autarky, the opportunity costs determine the prices of goods. In this analysis prices are in the form of relative prices. This means that the price of one good will be in terms of the other. For example, the price of cloth in England in the absence of trade is 5/6 barrel of wine per yard of cloth. In Portugal it is 9/8 barrel of wine per yard cloth. England would be better off producing cloth and trading to Portugal for wine than producing wine at home. The opposite case would hold for Portugal. Portugal gains by producing and exporting wine and purchasing its cloth from England. Of course in the process the prices of wine and cloth would change.

With trade, the relative price of cloth will rise in England and fall in Portugal. This will continue until there is one set of prices called the terms of trade. Note that the terms of trade will fall somewhere between 9/8 barrel and 5/6 barrel of wine per yard of cloth. Let us arbitrarily choose the terms of trade of 1 barrel / yd.

At these terms of trade, England should shift labor out the production of wine into the production of cloth. By reducing wine production by one barrel England can reallocate the 120 hrs of labor to cloth production. Cloth production would rise by 120/100 yd. or 1 & 1/5 yd. of cloth. At this point England has given up 1 bbl of wine but gains 1 & 1/5 yd. of cloth. Now, let England trade 1 yard of cloth for 1 barrel of wine from Portugal. Overall after shifting production and trading England comes out ahead by 1/5 yd.

Similarly, if Portugal shifts labor out of cloth production into wine production it would be able to produce 9/8 barrel of wine. After trading with England, Portugal would gain 1/8 barrel of wine. Trade mutually benefits both countries.

⇐ Предыдущая 12