Class 1021: Ricardian Model Krugman ch' 4 and Ricardo

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Class 10/21 Ricardian Model (Krugman ch. 4 and
Ricardo)
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Main Concepts

• Absolute Advantage high productivity overall
  leads to higher living standards but not more
  international trade.
• Comparative Advantage relatively high
  productivity in producing one good vs. some other
  good creates gains from trade.

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Two Countries, 3 Goods

• North and South
• High tech., medium tech, and low tech
• Give North comparative advantage in high tech and
  South in low tech
• Suppose medium tech good is produced in both
  regions

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Results I

• Relative wage equals relative productivity in
  medium tech
• North will produce all high tech and exports some
  to South
• South produces all low tech and exports some to
  North
• Both regions are better off due to trade

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Results II

• Counterfactuals for South productivity both
  regions still produce medium tech.
• If South productivity rises x in both low and
  medium tech South better off and North
  unaffected.
• If South productivity rises only in low tech
  South better off and North better off.
• If South productivity rises in medium tech South
  better off and North worse off.

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Application to China and US

• Opening up trade with China
• Trade deficit or adjustment of relative wage?
• Will both sides gain?
• China experiencing productivity gains, in which
  types of goods?
• Will both sides gain?
• What do we predict in 20 years?