ECON231 Lecture Notes - Lecture 2: Protectionism, Kosovo Force, Real Wages

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blackgoose62

19 Apr 2018

School

University of Waterloo

Department

Economics

Course

ECON231

Professor

Jean Forand

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Document Summary

Chapter 3 labor productivity & ricardian model. Theories of why trade occurs: differences across countries in labor, labor skills, capital, natural resources & technology, economies of scale larger scale production is more efficient. A labor unit requirement for production of 1 unit of good. Horizontal intercept when qw = 0, qc = l/alc. Vertical intercept when qc =0, qw = l/alw. Slope (opportunity cost of producing c) = rise/run = - (alc/alw) Relative prices, wages & supply before trade: hourly wages are equal to the market value of good produced in an hour pc/alc or pw/alw. If pc/pw (relative price) > alc/alw (opportunity cost of producing c: wage of c will exceed wage of w [pc/alc > pw/alw] workers will only make cheese (economy specializes in c) If pc/pw (relative price) < alc/alw (opportunity cost of producing c: wage of w will exceed wage of c [pw/alw > pc/alc] workers will only make win (economy specializes in w)

Related Questions

1. Evaluate the following two statements. (1) The Ricardian model predicts wages across countries are correlated with labor productivity differences. (2) In the data, there is a correlation between wages and productivity at the national level.

A. Both are true

B. Both are false

C. (1) Is false and (2) is true

D. (1) is true and (2) is false

2. Does the Ricardian model imply that it is bad to trade with low wage countries?

A. Yes, lower prices will not benefit high wage countries

B. Yes, trade with low-wage countries will translate to lower wages at home.

C. No, rich countries only sometimes lose when trading with poor countries.

D. No, wages at home are reflective of the home countryâs labor productivity.

E. (A) and (B) are true

maroonraccoon736

âJapanese labor productivity is roughly the same as that of the US in the manufacturing sector, while the US is more productive in the service sector. But most services are nontradable. Some have argued that this poses a problem for the US, because USâs comparative advantage lies in things US cannot sell on world markets. â

To evaluate this statement, develop a small Ricardian model: Japan has roughly a third of the population of the United States, so set L = 30 and L â = 10. Suppose there are two manufacturing sectors (i.e., cars and electronics), and a non-tradable service sector. Suppose that the technologies have labor productivity of one in all sectors for Japan. Let the US have a labor productivity for manufacturing sectors of one as well, and a productivity of services of 2. Let utility be Cobb-Douglas, with a share of expenditure on cars and electronics of 0.15 each, and a share of expenditure on services of 0.7. Suppose there are extremely small trade costs between countries, which you normally ignore, but in case of indifference between home and foreign sourcing in the absence of trade costs, the good will be bought from home. Trade costs are infinite for services.

1. Solve the model, e.g., derive results for production, consumption, wages, and prices in each country and calculate welfare in each country.

2. Now assume that the US had a labor productivity in services of 1, but a labor productivitity in cars of 2. Again, solve the model, e.g., derive results for production, consumption, wages, and prices in each country and calculate welfare in each country.

3. Use your results from the previous to steps to comment on the statement above.

You are given the information shown in the table about production relationship in Pugelovia and Pomerania below:

	Labor Hours Per Unit of Rice	Labor Hours Per Unit of Cloth
Pugelovia	75	100
Pomerania	50	50

You make several Ricardian assumptions: these are the only two commodities, the productivity of labor is constant for each product no matter how much is produced, and competition prevails in all markets.

1)Compute the productivity of each country for each product. Which country has an absolute advantage at producing rice? Which country has an absolute advantage at producing cloth?

2)Compute the relative prices of each product in each country without trade. Which country has a comparative advantage at producing rice? Which country has a comparative advantage at producing cloth?

3)According to the theory of comparative advantage, which country would export rice? Which country would export cloth?

4)If Pugelovia and Pomerania are allowed to trade, what would be the limits for the relative price of rice? What would be the limit for the relative price of cloth?

5)Assume that no trade is allowed between the countries and that Pugelovia has 10,000 hours of labor available to use. If people want to consume rice and cloth in equal amounts, how much rice and how much cloth would Pugelovia produce?

6)Plot the production possibility curve for Pugelovia if it has 10,000 hours of labor available. Label the economyâs production of rice and cloth from part e point A on the PPC.

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ECON231 Lecture Notes - Lecture 2: Protectionism, Kosovo Force, Real Wages

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