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ECON 423 (1)
Chapter 2

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Economics (Arts)
ECON 423
William Watson

Feenstra and Taylor, Ch. 2: Trade and Technology: The Ricardian Model David Ricardo (1772-1823) Ricardo’s (very brief) analysis of “comparative advantage,” a term he doesn’t actually use, can be found on the course website under “Supplementary material.” Comparative Advantage: The simplest possible numerical example Suppose the productivity of Chinese and Canadian workers is as follows: Output per day: Bushels of wheat Cars Worker in China 1 2 Worker in Canada 3 1 1. If Canadians want more cars, how much wheat do they have to give up in order to produce an extra car, i.e., what’s the “opportunity cost” of a car? What is the “price” of a car in Canada? What is the “price” of wheat in Canada? 2. Suppose Chinese decide they want more wheat. How much wheat do they get if they produce one less car? What is the “price” of wheat in China? What is the “price” of cars? 3. How do people’s opportunities change if trade is opened up between the two countries? How could Chinese and Canadians benefit from trading with each other? How could a “middleman” benefit from arranging trade between Chinese and Canadians? Should trade take place? Will trade take place? 4. Suppose time passes. Chinese spend their time investing and increasing their productivity. Canadians spend their time playing and watching hockey, and as a result their productivity stays constant: After 20 years, each Canadian can still produce 3 bushels of wheat per day or 1 car per day. But each Chinese can now produce 10 bushels of wheat per day or 20 cars per day. Answer questions 2, 3, and 4 again. Do your answers surprise you? 5. What is the difference between “absolute advantage” and “comparative advantage”? In which of the above cases does each country have an “absolute advantage” over its neighbour? In which cases does it have a “comparative advantage”? 6. Suppose it were costly—as it is—to ship goods between China and Canada. How costly would it have to be to cause trade between the two countries to cease? 7. A tariff is a tax on goods imported into one country from another. How high would a Chinese tariff on imports from Canada have to be in order to cause trade with Canada to cease? Would it make sense for China to impose such a tariff? Some economists have argued that it is useful to think of a tariff as an artificially-created transport cost? Why might they argue this? 8. What is the real benefit of trade: having a market for your exports or a new source of cheaper imports? 9. “A country can have a comparative advantage in the production of a given good without having an absolute advantage in its production, but it can’t have an absolute advantage without having a comparative advantage.” Comment. 10. What is the “Pareto criterion”
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