International economics Factor availability Pugel Ch. 4

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Summary: absolute advantage A country enjoys an absolute advantage over country B in the production of product X when –One worker in country A produces more units of X in one hour than that of in country B does. –One worker in country A needs less hours to make one unit of X than one worker needs in country B.

Summary: comparative advantage Country A enjoys a comparative advantage in the production of good X when –It has a relative advantage in labour productivity –bigger absolute advantage or –less absolute disadvantage Assumption: 2 countries (A and B), 2 products (x and y)

Summary: comparative advantage Calculation (Px stands for labour productivity for x or output of x per hour): –Px/Py(A) > Px/Py(B) means that country A has a comparative advantage in producing x –PA/PB(x) > PA/PB(y) means that country A has a comparative advantage in producing x

Factor availability New assumptions: –Two factors (usually capital : K and labour : L) –Increasing marginal costs of production instead of constant marginal costs (Ricardo’s approach) MRT (marginal rate of transformation) is not constant on the PPC curve (bowed) MRT yx = -Δy / Δx

S1: MRTcw=-1W/C S0: MRTcw=-2W/C S2: MRTcw=-3W/C In S1: to produce 1 unit cloth we pass up producing 1 unit of wheat In S2: for 1 unit cloth we give up producing 2 units of wheat

National level Suppose that the market price of cloth in terms of wheat is 2 W/C. –If the opportunity cost of producing another unit of cloth is less than 2 W/C (S1) -> make more cloth –If the opportunity cost of producing another unit of cloth is more than 2 W/C (S2) -> make less cloth –If the opportunity cost of producing another unit of cloth is equal to 2 W/C (S0) -> right amount of cloth

Budget constraint: Y=Pw · Qw + Pc · Qc

National level, no trade