INTL 2200 Chapter Notes - Chapter 2: Transaction Cost, Absolute Advantage, Autarky
25 Mar 2016
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Ch2, ricardian model unit-labour cost (labour compensation / labour productivity ) adjusted by exchange rate. Er is function of interest rate differentiation current account: goods and services primarily. Investment income is not an investment transaction, it is the income generated from investment. capital/investment/financial accounts: asset transaction. Comparative advantage -> based on its productivity/technology difference. 2 goods/commodities: agriculture as in a bushel of wheat, (x) and manufacture, as in a meter of cloth, (y) 1 input: labour (l) x = f(l), y = f(l) Workers make machines, machines aren"t independent entities, workers make them work . Lx + ly = lbar, size of the labour force. Now suppose: ax = 1/2, ay = 1/5 ax* = 1/20, ay* = 1/10 from ax and ay, 2l = 1x and 5l = 1y from ax* and ay*, 20l* = 1x and 10l* = 1y. L is the labour requirement per unit of output.
