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```					INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;    Charles van Marrewijk, 2006; 1

International trade based on differences in technology assumptions
• 2 countries; A and B
• 2 goods; X and Y
• 1 factor of production; labour L
• Constant returns to scale; CRS
• Labour mobility between sectors, not between countries
• Perfect competition
• No transport costs
unit labour requirement = units of labour required to produce one
unit of a final good By assumption this is independent of the
number of labourers active in a sector (CRS), but may differ between
the two countries.
Let ax be the unit labour requirement for good X in country A, etc
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;     Charles van Marrewijk, 2006; 2

We can make a table to summarize the state of technology
good X            good Y
country A                       ax    =6              ay      =4
country B                       bx    =2              by      =3
To be concrete we put some actual numbers in the table
Note that country B is more efficient than country A; it uses less
labour to produce 1 unit of good X and it uses less labour to produce
1 unit of good Y. Why on earth would it trade with country A?
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;     Charles van Marrewijk, 2006; 3

Recall the productivity table
good X                 good Y
country A                       ax    =6              ay      =4
country B                       bx    =2              by      =3

First we derive the production possibility frontiers
Assume that country A has 600 laborers and country B has 300
Country A can produce 600/6 = 100 of X;              or 600/4 = 150 of Y
Country B can produce 300/2 = 150 of X;              or 300/3 = 100 of Y
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;    Charles van Marrewijk, 2006; 4

Country A can thus produce at most 100 X or 150 Y
Y     If 12 Labour is moved from Y to X country A produces
3 less Y and 2 more X; independent of the initial point
150               Country A’s ppf is thus a straight line
A         (because of CRS and 1 factor of production)
100                                     Similarly for country B

B

0                  100        150             X
Suppose that consumers in country A and in country B always want
to consume at least some of both goods
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;    Charles van Marrewijk, 2006; 5

In autarky (without trade) country A might produce and consume
Y                 At point A, country B at point B
Note that if country A wanted to change its
consumption point it would have to move
A         along its own ppf.
If A wants to consume more X it
has to give up 6/4 = 1.5 units of Y
A’s opportunity cost of X is 1.5 Y

B

0                                        X
If B wants to consume more X it has to give up 2/3 = 0.66 of Y
B’s opportunity cost of X is only 0.66 Y
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;     Charles van Marrewijk, 2006; 6

The opportunity cost differences are evident from the table
good X                 good Y
country A                       ax    =6              ay      =4        ax/ay = 1.5
country B                       bx    =2              by      =3        bx/by = .66
If A wants to consume 1 more X it needs ax labour. These have to
come from sector Y, where ax labour could have produced ax/ay of Y
Similarly, for B the opportunity cost of X is bx/by of Y
Good X is relatively expensive in country A if its opportunity cost in
terms of Y are larger than in B, i.e. if ax/ay > bx/by
For country B this implies that the opportunity cost of X is low
relative to country A: Country B has a comparative advantage in X
For country A the opportunity cost of Y in terms of X is low relative
to country B:         Country A has a comparative advantage in Y
INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;    Charles van Marrewijk, 2006; 7

The differences in opportunity costs give rise to gains from trade
If A specializes in the production of X and B in the production of Y
They may trade with each other, say at px/py = 0.90
Y
Say A wants to buy 40 X      It has to pay 36 Y
Apr                 And might produce at Apr and consume at Ac
Provided B is willing to demand 36 Y
Ac
A                    In exchange for 40 X
have to coincide
Bc
Both countries gain: they