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)
MRTyx = -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