Chapter 3

Labor Productivity and Comparative Advantage: The

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Ricardian Model

3The Concept of Comparative Advantage

Trade between two countries can benefit both countries if

each country exports that good in which it has a comparative advantage.

each country enjoys superior terms of trade.

each country has a more elastic demand for the imported goods.

each country has a more elastic supply for the exported

goods.

Both C and D.

A

Previous Edition

In order to know

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whether a country has a comparative advantage in the production of one particular product we need information on at least ________ unit labor requirements

one

two

three

four

five AnD QuPrevious Edition

A country engaging in trade according to the principles of comparative advantage gains from trade because it

is producing exports indirectly

more efficiently than it could alternatively.

is producing

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imports indirectly more efficiently than it could domestically.

is producing exports using fewer labor units.

is producing imports indirectly using fewer labor units.

None of the above. AnB QuPrevious Edition

Given the information in the table above, if it is ascertained that Foreign uses prison-slave labor to produce its exports, then home should

export cloth.

export widgets.

export both and import nothing.

export

4

and import nothing.

All of the above. AnA QuPrevious Edition

Given the information in the table above, if the Home econ

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omy suffered a meltdown, and the Unit Labor Requirements doubled to 30 for cloth and 60 for widgets then home should

export cloth.

export widgets.

export both and import nothing.

export and import nothing.

All of the above. AnA QuPrevious Edition

The earliest statement of the principle of comparative advantage is associated with

David Hume.

David

Ricardo.

Adam Smith.

Eli Heckscher.

Bertil Ohlin.

B

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Previous Edition

The Gains from Trade associated with the principle of Comparative Advantage depends on

the trade partners must differ in technology or tastes.

there can be no more goods traded than the number of trade partners.

there may be no more trade partners than goods traded.

All of the above.

None of the above. AnA QuPrevious Edition

The Ricardian model demonstrates that

trade between two countries will benefit both countries.

t

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rade between two countries may benefit both regardless of which good each exports.

trade between two countries may benefit both if each exports the product in which it has a comparative advantage.

trade between two countries may benefit one but harm the other.

None of the above. AnC QuNew

A One-Factor Economy

Given the following information:

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(a)

What is the marginal cost of a toy in each country?(b) How might you demonstrate (quantitatively) that a country with absolute productivity advantage in a product may find that its production is more costly than in the other (unproductive) country?(c)

Demonstrate the fact that trade produces imports (indirectly) cheaper, even in the relatively unproductive country. An(a) 3 units of Soy in the U.S., and 1 Soy unit in Croatia.(b) The U.S. have absolute productivity

advantage in toys. Nevertheless, toys are three times more c

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ostly than they are in Croatia.(c) In Croatia, one unit of soy will cost one toy. However, if the terms of trade fall between the two autarkic price ratios (a condition necessary for both countries to enjoy gains from trade), say at 2 Soy units per toy, then Croatia will gain each Soy unit with less of a sacrifice of toy production. QuPrevious Edition

3Trade in a One-Factor World

Given the information in the table above

neither country has

a comparative advantage.

Home has a comparative advantage

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in cloth.

Foreign has a comparative advantage in cloth.

Home has a comparative advantage in widgets.

Home has a comparative advantage in both products. AnB QuPrevious Edition

Given the information in the table above, if wages were to double in Home, then Home should

export cloth.

export widgets.

export both and import nothing.

export and import nothing.

All of the above.

A

Previous Edition

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Given the information in the table above

neither country has a comparative advantage.

Home has a comparative advantage in cloth.

Foreign has a comparative advantage in cloth.

Foreign has a comparative advantage in widgets.

Home has a comparative advantage in both products. AnC QuPrevious Edition

Given the information in the table above, the opportunity cost of cloth in

terms of widgets in Foreign is if it is ascertained that For

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eign uses prison-slave labor to produce its exports, then home should

export cloth.

export widgets.

export both and import nothing.

export and import nothing.

All of the above. AnB QuPrevious Edition

Given the information in the table above, if wages were to double in Home, then Home should

export cloth.

export widgets.

export both and import nothing.

export and import nothing.

All of the above.

B

Previous E

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dition

Given the information in the table above, if the world equilibrium price of widgets were 4 Cloths, then

both countries could benefit from trade with each other.

neither country could benefit from trade with each other.

each country will want to export the good in which it enjoys comparative advantage.

neither country will want to export the good in which it enjoys comparative advantage.

both

countries will want to specialize in cloth.

A

Previous Editi

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on

Given the information in the table above, if the world equilibrium price of widgets were 40 cloths, then

both countries could benefit from trade with each other.

neither country could benefit from trade with each other.

each country will want to export the good in which it enjoys comparative advantage.

neither country will want to export the good in which it enjoys comparative advantage.

both countries

will want to specialize in cloth.

A

Previous Edition

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In a two product two country world, international trade can lead to increases in

consumer welfare only if output of both products is increased.

output of both products and consumer welfare in both countries.

total production of both products but not consumer welfare in both countries.

consumer welfare in both countries but not total production of both products.

None of the above. AnB QuPrevious

Edition

As a result of trade, specialization in the Ricard

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ian model tends to be

complete with constant costs and with increasing costs.

complete with constant costs and incomplete with increasing costs.

incomplete with constant costs and complete with increasing costs.

incomplete with constant costs and incomplete with increasing costs.

None of the above. AnB QuPrevious Edition

10)

As a result of trade between two countries which are

of completely different economic sizes, specialization in th

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e Ricardian 2X2 model tends to be

incomplete in both countries

complete in both countries

complete in the small country but incomplete in the large country

complete in the large country but incomplete in the small country

None of the above. AnC QuPrevious Edition

11)

A nation engaging in trade according to the Ricardian model will find its consumption bundle

inside its production possibilities frontier.

on its production possibilities frontier.

outside its prod

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uction possibilities frontier.

inside its trade-partner's production possibilities frontier.

on its trade-partner's production possibilities frontier. AnC QuPrevious Edition

12)

In the Ricardian model, if a country's trade is restricted, this will cause all except which?

limit specialization and the division of labor

reduce the volume of trade and the gains from trade

cause nations to produce inside their production possibilities

curves

may result in a country producing some of the produ

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ct of its comparative disadvantage

None of the above. AnC QuPrevious Edition

If a very small country trades with a very large country

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according to the Ricardian model, then

the small country will suffer a decrease in economic welfare.

the large country will suffer a decrease in economic welfare.

the small country only will enjoy gains from trade.

the large country will enjoy gains from trade.

None of the above. AnC QuPrevious Edition

14)

If the world terms of trade for a country are somewhere between the domestic cost ratio of H and that of F, then

country H but not country F will gain from trade.

country

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H and country F will both gain from trade.

neither country H nor F will gain from trade.

only the country whose government subsidizes its exports will gain.

None of the above. AnB QuPrevious Edition

15)

If the world terms of trade equal those of country F, then

country H but not country F will gain from trade.

country H and country F will both gain from trade.

neither country H nor F will

gain from trade.

only the country whose government subsidi

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zes its exports will gain.

None of the above. AnA QuPrevious Edition

16)

If the world terms of trade equal those of country H, then

country H but not country F will gain from trade.

country H and country F will both gain from trade.

neither country H nor F will gain from trade.

only the country whose government subsidizes its exports will gain.

None of the above. AnE Qu

Previous Edition

According to Ricardo, a country will have

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a comparative advantage in the product in which its

labor productivity is relatively low.

labor productivity is relatively high.

labor mobility is relatively low.

labor mobility is relatively high.

None of the above. AnB QuPrevious Edition

Assume that labor is the only factor of production and th

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at wages in the United States equal $20 per hour while wages in Japan are $10 per hour. Production costs would be lower in the United States as compared to Japan if

U.S. labor productivity equaled 40 units per hour and Japan's 15 units per hour.

U.S. productivity equaled 30 units per hour whereas Japan's was 20.

U.S. labor productivity equaled 20 and Japan's 30.

U.S. labor productivity equaled 15 and Japan's 25 units per hour.

None of the above. AnA Qu

Previous Edition

If two countries engage in Free Trade fol

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lowing the principles of comparative advantage, then

neither relative prices nor relative marginal costs (marginal rates of transformation-MRTs) in one country will equal those in the other country.

both relative prices and MRTs will become equal in both countries.

relative prices but not MRTs will become equal in both countries.

MRTs but not relative prices will become equal in both countries.

None of the above. AnC QuPrevious

Edition

Let us define the real wage as the purchasing powe

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r of one hour of labor. In the Ricardian 2X2 model, if two countries under autarky engage in trade then

the real wage will not be affected since this is a financial variable.

the real wage will increase only if a country attains full specialization.

the real wage will increase in one country only if it decreases in the other.

the real wage will rise in both countries.

None of the above. AnD QuPrevious Edition

21)

In a two

country and two product Ricardian model, a small country is

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likely to benefit more than the large country because

the large country will wield greater political power, and hence will not yield to market signals.

the small country is less likely to trade at price equal or close to its autarkic (domestic) relative prices.

the small country is more likely to fully specialize.

the small country is less likely to fully specialize.

None of the above. AnB QuNew

22)

In the Ricardian model, comparativ

e advantage is not likely be due to

scale economies.

hom

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e product taste bias.

greater capital availability per worker.

All of the above.

None of the above. AnD QuNew

An examination of the Ricardian model of comparative adva

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ntage yields the clear result that trade is (potentially) beneficial for each of the two trading partners since it allows for an expanded consumption choice for each. However, for the world as a whole the expansion of production of one product must involve a decrease in the availability of the other, so that it is not clear that trade is better for the world as a whole as compared to an initial situation of non-trade (but efficient production in each country). Are there in fact gains from trade for the world as a whole? Explain. AnIf we were to combine

the production possibility frontiers of the two countries to

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create a single world production possibility frontier, then it is true that any change in production points (from autarky to specialization with trade) would involve a tradeoff of one good for another from the world's perspective. In other words, the new solution cannot possibly involve the production of more of both goods. However, since we know that each country is better off at the new solution, it must be true that the original points were not on the trade contract curve between the two countries, and it was in fact possible to make some people better off

without making others worse off, so that the new solution do

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es indeed represent a welfare improvement from the world's perspective. QuPrevious Edition

24)

It is generally claimed that a movement from autarky to free trade consistent with Ricardian comparative advantage increases the economic welfare of each of the trade partners. However, it may be demonstrated that under certain circumstances, not everyone in each country is made better off. Illustrate such a case. An(a) If inter-generational, or economic growth considerati

ons are taken into account, then a country may end up specia

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lizing in a good that has no or few growth linkages with the rest of the economy (e.g. an "enclave" sector).(b) If some of the residents of a country have tastes biased toward their exportable, then they may suffer due to the trade-affected increase in the market price of the exportable good. QuPrevious Edition

25)

It is generally claimed that state trading, or centrally controlled trading will tend to reach a lower economic welfare than would be reached by allowing market forces to determine trade flow directions and terms of trade.

Illustrate a counter-example to this proposition.

In genera

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l, if we begin with any suboptimal distortion, the theory of the second best tells us that an additional "distortion" may move a country in the correct direction of a welfare improvement. For example, If a country has an overvalued exchange rate (that is, its currency is overpriced in the foreign exchange markets), it is possible that it will find itself in an autarkic equilibrium (that is, it might "overprice itself out of the international market"). In such a case it is easy to demonstrate that if the government exports the goods in which the country enjoys comparative advantage, and imports the

other (bypassing market prices and mechanisms), the country'

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s economic welfare will improve. QuPrevious Edition

26)

The Ricardian proposition that international trade will benefit any country ("gains from trade") as long as the world terms of trade do not equal its autarkic relative prices is a straightforward and powerful concept. Nevertheless, it is impossible to demonstrate empirically. Why? AnThis is because there is no way of knowing exactly what are, or would have been, the autarky MRTs or MRSs. This is because there is no single example in the world of a

country that is totally unengaged in international trade.

P

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revious Edition

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27)

Given the information in the table above. What is the opportunity cost of Cloth in terms of Widgets in Foreign? AnOne half a widget. QuPrevious Edition

28)

Given the information in the table above. If these two countries trade these two goods in the context of the Ricardian model of comparative advantage, then what is the lower limit of the world equilibrium price of widgets? An1/2 Cloths. QuPrevious Edition

29)

Given the information in the table above. If these two count

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ries trade these two goods with each other in context of the Ricardian model of comparative advantage, what is the lower limit for the price of cloth? AnOne half a widget. QuPrevious Edition

30)

Given the information in the table above. What is the opportunity cost of cloth in terms of Widgets in Foreign? An2 widgets. QuPrevious Edition

3Misconceptions About Comparative Advantage

If a production possibilities frontier is bowed out

(concave to the origin), then production occurs under condit

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ions of

constant opportunity costs.

increasing opportunity costs.

decreasing opportunity costs.

infinite opportunity costs.

None of the above. AnB QuPrevious Edition

If the production possibilities frontier of one the trade partners ("Country A") is bowed out (concave to the origin), then increased specialization in production by that country will

increase the economic welfare of both countries.

increase the economic welfare of only Country A.

decreas

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e the economic welfare of Country A.

decrease the economic welfare of Country B.

None of the above. AnA QuPrevious Edition

If two countries have identical production possibility fro

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ntiers, then trade between them is not likely if

their supply curves are identical.

their cost functions are identical.

their demand conditions are identical.

their incomes are identical.

None of the above. AnE QuPrevious Edition

If two countries have identical production possibility frontiers, then trade between them is not likely if

their supply curves are identical.

their cost functions are identical.

their demand functions

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differ.

their incomes are identical.

None of the above. AnC QuPrevious Edition

If one country's wage level is very high relative to the other's (the relative wage exceeding the relative productivity ratios), then if they both use the same currency

neither country has a comparative advantage.

only the low wage country has a comparative advantage.

only the high wage country has a comparativ

e advantage.

consumers will still find trade worth while f

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rom their perspective.

None of the above. AnE QuPrevious Edition

If one country's wage level is very high relative to the other's (the relative wage exceeding the relative productivity ratios), then

it is not possible that producers in each will find export markets profitable.

it is not possible that consumers in both countries will enhance their respective welfares through imports.

it is not possible that both countries

will find gains from trade.

it is possible that both will

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enjoy the conventional gains from trade.

None of the above. AnD QuPrevious Edition

If one country's wage level is very high relative to the other's (the relative wage exceeding the relative productivity ratios) then it is probable that

free trade will improve both countries' welfare.

free trade will result in no trade taking place.

free trade will result in each country exporting the good in which it enjoys comparative advantage.

free trade will result in each country exporting the good

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in which it suffers the greatest comparative disadvantage.

None of the above. AnB QuPrevious Edition

In a two-country, two-product world, the statement "German

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y enjoys a comparative advantage over France in autos relative to ships" is equivalent to

France having a comparative advantage over Germany in ships.

France having a comparative disadvantage compared to Germany in autos and ships.

Germany having a comparative advantage over France in autos and ships.

France having no comparative advantage over Germany.

None of the above. AnA Qu

Previous Edition

If the United States' production possibilit

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y frontier was flatter to the widget axis, whereas Germany's was flatter to the butter axis, we know that

the United States has no comparative advantage

Germany has a comparative advantage in butter.

the U.S. has a comparative advantage in butter.

Not enough information is given.

None of the above. AnB QuPrevious Edition

10)

Suppose the United States' production possibility frontier

was flatter to the widget axis, whereas Germany's was flatte

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r to the butter axis. We now learn that the German mark sharply depreciates against the U.S. dollar. We now know that

the United States has no comparative advantage

Germany has a comparative advantage in butter.

the United States has a comparative advantage in butter.

Not enough information is given.

None of the above. AnB QuPrevious Edition

11)

Suppose the United states production possibility

frontier was flatter to the widget axis, whereas Germany's w

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as flatter to the butter axis. We now learn that the German wage doubles, but U.S. wages do not change at all. We now know that

the United States has no comparative advantage.

Germany has a comparative advantage in butter.

the United States has a comparative advantage in butter.

Not enough information is given.

None of the above. AnB QuPrevious Edition

12)

Which of the following

statements is true?

Free trade is beneficial only if your

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country is strong enough to stand up to foreign competition.

Free trade is beneficial only if your competitor does not pay unreasonably low wages.

Free trade is beneficial only if both countries have access to the same technology.

All of the above.

None of the above. AnE QuPrevious Edition

Mahatma Ghandi exhorted his followers in India to promote

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economic welfare by decreasing imports. This approach

makes no sense.

makes no economic sense.

is consistent with the the Ricardian model of comparative advantage.

is not consistent with the Ricardian model of comparative advantage.

None of the above. AnD QuPrevious Edition

14)

The Country of Rhozundia is blessed with rich copper deposits. The cost of Copper produced (relative to

the cost of Widgets produced) is therefore very low. From th

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is information we know that

Rhozundia has a comparative advantage in Copper

Rhozundia should export Copper and import Widgets

Rhozundia should export Widgets and export Copper

Both A and B are true.

None of the above. AnE QuPrevious Edition

15)

We know that in antiquity, China exported silk because no-one in any other country knew how to produce this product. From this

information we learn that

China enjoyed a comparative adva

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ntage in silk.

China enjoyed an absolute advantage, but not a comparative advantage in silk.

no comparative advantage exists because technology was not diffused.

China should have exported silk even though it had no comparative advantage.

None of the above. AnA QuPrevious Edition

16)

The pauper labor theory, and the exploitation argument

are theoretical weaknesses

that limit the applicability of the Ricardian concept of com

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parative advantage.

are theoretically irrelevant to the Ricardian model, and do not limit its logical cogency.

are not relevant because the Ricardian model is based on the labor theory of value.

are not relevant because the Ricardian model allows for different technologies in different countries.

None of the above. AnB QuNew

17)

If labor productivities were exactly proportional to wage levels internationally, this

would

not negate the logical basis for trade in the Ricard

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ian model.

render the Ricardian model theoretically correct but practically useless.

negate the logical basis for trade in the Ricardian model.

negate the applicability of the Ricardian model if the number of products were greater than the number of trading partners.

None of the above. AnA QuNew

Many countries in sub-Saharan Africa have very low labor

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productivities in many sectors, in manufacturing and agriculture. They often despair of even trying to attempt to build their industries unless it is done in an autarkic context, behind protectionist walls because they do not believe they can compete with more productive industries abroad. Discuss this issue in the context of the Ricardian model of comparative advantage. AnThe Ricardian model of comparative advantage argues that every country must have a comparative advantage in some product (assuming there are more products than

countries). However, the Ricardian model is not a growth mod

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el, and cannot be used to identify growth nodes or linkages. QuPrevious Edition

19)

In 1975, wage levels in South Korea were roughly 5% of those in the United States. It is obvious that if the United States had allowed Korean goods to be freely imported into the United States at that time, this would have caused devastation to the standard of living in the United States, because no producer in this country could possibly compete with such low wages. Discuss this assertion in the context of the Ricardian model of comparativ

e advantage.

Regardless of relative wage levels, the United

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States would be able to provide its populace with a higher standard of living than would be possible without trade. Also, low wages tend to be associated with low productivities. QuPrevious Edition

20)

The evidence cited in the chapter using the examples of the East Asia New Industrializing Countries suggests that as international productivities converge, so do international wage levels. Why do you suppose this happened for the East Asian NICs? In light of your answer, what do you think is

likely to happen to the relative wages (relative to those in

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the United States) of China in the coming decade? Explain your reasoning. AnFollowing the logic of the Ricardian model of comparative advantage, the East Asian countries played to their respective comparative advantages. This allowed the world demand to provide excess demands for their relatively abundant labor, which in turn tended to raise these wages. If China follows the same pattern, their wages levels should also be expected over time to converge to those in their industrialized country markets. QuPrevious

Edition

Comparative Advantage with Many Goods

The

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multi-good (2-country) model differs from the two country, two product model, in that in the former,

the relative wage ratio will determine the pattern of trade ( which good is exported by which country.

one cannot determine which country will export which product given only labor productivity data.

full specialization is less likely to hold in equilibrium.

All of the above.

None of the above. AnD QuNew

2)

When we examine the 2 Good 2 Country version of the Ricardi

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an model of comparative advantage, we note that comparative advantage is totally determined by physical productivity ratios. Changes in wage rates in either country cannot affect these physically determined comparative advantages, and hence cannot affect, which product will be exported by which country. However, when more than 2 goods are added to the model (still with 2 countries), changes in wage rates in one or the other country can in fact determine which good or goods each of the countries will export. How can you explain this anomaly? AnThis is not

really an anomaly. As long as only two goods exist, then as

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long as trade takes place, each country must have a comparative advantage in one of them (or none). However, if there are more goods than countries, then the physical productivity definition of comparative advantage becomes ambiguous. Changes in relative wage rates will shift the international competitiveness along the "chain of comparative advantage." QuPrevious Edition

3Adding Transport Costs and Nontraded Goods

If transportation costs are especially high for

Widgets in a Ricardian 2X2 model in which Country A enjoys a

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comparative advantage, then

Country B must also enjoy a comparative advantage in Widgets.

Country B may end up exporting Widgets.

Country A may switch to having a comparative advantage in the other good.

All of the above.

None of the above. AnE QuPrevious Edition

3Empirical Evidence on the Ricardian Model

There are no questions for this section. AnTRUE

New

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