MGEC62H3 Chapter 3: Chapter 3 Notes

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lavenderdonkey6

18 Oct 2011

School

UTSC

Department

Economics for Management Studies

Course

MGEC62H3

Professor

Garth Frazer

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Document Summary

Chapter 3 labour productivity and comparative advantage: the ricardian. The pauper labour argument: myth 2: foreign competition is unfair and hurts other countries when it is based on low wages. It is costly to transport goods and services, and in some cases the cost of transportation is enough to lead countries into self- sufficiency in certain sectors. Summary: we examined the ricardian model, the simplest model that shows how differences between countries give rise to trade and gains from trade. In this model labour is the only factor of production and countries differ only in the productivity of labour in different industries. In the ricardian model, countries will export goods that their labour produces relatively efficiently and import goods that their labour produces relatively inefficiently. In other words, a country"s production pattern is determined by comparative advantage: that trade benefits a country can be shown in either of two ways.

Related Questions

A country has a comparative advantage in producing a good if:

A) it can produce that good at a lower opportunity cost.
B) it will find trade most beneficial when it trades with another country that has a comparative advantage in the same good.
C) it will not find trade beneficial because other country(ies) won't have a comparative advantage in other goods.
D) it must also have an absolute advantage in the good

ultramarinerabbit662

Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

skybee160

6. According to the theory of comparative advantage in international trade, a country will export a good only if

a. It can produce it using less labor than other countries.

b. Its productivity is higher in producing the goods than the productivity of other countries in producing it.

c. Its wage rate in producing the good is lower than in other countries.

d. Its cost of producing the good, relative to other goods, is at least as low as in other countries.

MGEC62H3 Chapter 3: Chapter 3 Notes

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