Comparative Advantages

1
Comparative Advantages

• Econ 303 International Economics
• Professor Carlos Benito

2
Why everybody trade?

• Mercantilism
• Growth comes from power
• Classic Economists
• Growth comes from efficiency
• absolute advantages (Adam Smith)
• relative (comparative) advantages (David Ricardo)

3
Labor Productivity Absolute Advantages
4
Labor Productivity Comparative Advantages
5
Possible relative prices in international market
6
2 x 2 models and relative prices

• Two countries
• US
• Rest of the World
• Two commodities
• cloth
• wheat
• Two economic agents
• consumers
• producers

7
Deriving supply curves from a production
possibility curve
Wheat, bushels
Cloth, yards
S
Bushels/yard
Cloth, yards
8
Deriving demand curves from indifference curves
Better
Wheat, bushels
Cloth, yards
Bushels/yard
D
Cloth, yards
9
Production of cloth under constant opportunity
cost
US
Rest of the World
Wheat, bushels
Wheat, bushels
Cloth, yards
Cloth, yards
S
Bushels/yard
Bushels/yard
S
Cloth, yards
Cloth, yards
Cloth, yards
10
Relative Prices

• Price index as a proxy for the price of the rest
  of goods and services I
• Nominal price of traded good in dollars Pnx or
  Pnm
• Relative price of traded good
• Px Pnx/I
• Pm Pnm/I