Docstoc

Summary

Document Sample
Summary Powered By Docstoc
					Summary of Session 2
     Comparative Advantage

          Section E10 Group 12
                   FOLIOT Nicolas;
                      HALL Fairfax;
                   HARNEDY Alan;
                          PEI Fei;
                  THAKKAR Mitesh;
                   VISENTIN Omar
    Overview of Comparative Advantage
   What is the benefit of trade
        Gains from exchange
        Gains from specialization
        Gains from knowledge transfer, can import advanced goods and service that they wouldn’t produce
        Gains from competition, lower price and innovation
        Gains from agglomeration and market size, economies of scale
        All countries benefits a comparative advantage
             A product you produce more efficiently than the others in your own country, which is reflected by a lower relative
              domestic price
        even if they don’t benefit from any absolute advantage
             Superior efficiency in one product production versus the other countries
        Absolute advantage                                                Comparative advantage
        (output per worker)                                               (output per worker)
                     Bread              Wine                                                 Bread          Wine
    North            10                 8                                 North              10             10
    South            3                  9                                 South              3              9
       A country has comparative advantage in producing a good if the opportunity cost of producing that good is lower in
        this country than in other country

    Sources of comparative advantage
       Natural resources
       Difference in technology
       Difference in abundance of resources
  Ricardian model
              North: before trade                                Bread              South in the short run
Bread
                                                Price of
 10                                             bread
                                                will rise
                                                in north
                                                and fall               3
                                                in south


                              10       Wine                                                                   Wine
                                                                                                  9
                                                                    Bread
                 South in the long run                                                 North in the long run
Bread

                                                                      10



      3


                                                                                                                       Wine
                                                   Wine
                                                                                                    10
                                   9
         (South)If adjustment cost is high, in the short run,bread producer will be worse off, and wine producer will better
          off. However,the average worker is still better off
         In the long run, there is one world price between initial price, every country will specialized in the production of
          good in which it has comparative advantage
Ricardian model
   Even a country is less efficient than another country in the production of every
    commodity, trade can still make it better off.
   It is a one factor model (which is labor in the model), only two goods in production,
    however, comparative advantage still holds in multigood model
Heckscher-Ohlin model (factor abundance
model)* advanced topic, not required
   Even when countries have the same technology and resources, as long as they differ
    in the relative factor endowment, comparative advantage and trade still arise.
   With trade, a counry specializes in and exports the good which it has comparative
    advantage and uses intensively the factor that is abundant

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:4
posted:7/4/2012
language:
pages:4