International Trade: Lecture Note 2

The Ricardian Model I

= Reading: Ch. 3 (KOM) or Ch. 2 (FT) =

Prepared by Professor Yong-Seok Choi

Two International Trade Theories

Traditional theories that explain what makes countries trade
with each other.
The Ricardian model
: Differences in productivity (or technology) of labor
between countries cause productive differences, leading
to gains from trade
The Heckscher-Ohlin model
: Differences in the amounts of labor, physical capital and
land (so called endowment) between countries cause
productive differences, leading to gains from trade.
International Trade: Theory and Policy Analysis, Prepared by Prof. Yong-Seok Choi

 Basic Idea of the Ricardian Model: Comparative Advantage

Definition: A country has a comparative advantage over
another country in producing a good if the opportunity cost of
producing that good in terms of other goods is lower in that
country than in another.
Note the difference from absolute advantage.
We say that a country has an absolute advantage over
another country in producing a good if it can produce that
good using fewer real resources than another.

International Trade: Theory and Policy Analysis, Prepared by Prof. Yong-Seok Choi

Numerical Example
Suppose that
2 countries producing 2 goods using only labor.
Unit labor requirement is defined by the number of hours
of labor required to produce one unit of good.
The structure of unit labor
requirements is as follows:

in unit labor requirement

Goods

Textile
Automobile

Country
Korea
China
1
2
2
8

Then we can know that

This unit labor requirement represents each countrys
technology in producing each good.
Korea has an absolute advantage in producing both goods.
i.e., Korea is more productive in both industries.
International Trade: Theory and Policy Analysis, Prepared by Prof. Yong-Seok Choi

 What about the comparative advantage?

First we have to calculate opportunity cost from ULR table.
in unit labor requirement
Goods

Textile
Automobile

Country
Korea
China
1
2
2
8

in opportunity cost
Goods

Textile
Automobile

Country
Korea
China
0.5
0.25
2
4

In Korea, if you give up producing one unit of textile then

one unit of labor will be released with which you can make
0.5 unit of automobile: the opportunity cost of producing
textile is 0.5 unit of automobile(repeat this calculation to fill
out the table.).
Now we can see that China has a comparative advantage in
producing textile (0.25 vs 0.5) while Korea in automobile
(2 vs 4).
International Trade: Theory and Policy Analysis, Prepared by Prof. Yong-Seok Choi

Generalized Analyses
Suppose that
2 countries producing 2 goods using only labor.
The technology structure of Home and Foreign in producing
wine and cheese are as the following table.
in unit labor requirement

Country
Home
Foreign

Wine
Goods
Cheese

Endowments of labor in each country are fixed at L and L*.

International Trade: Theory and Policy Analysis, Prepared by Prof. Yong-Seok Choi

A. Autarky Case
Production Possibility Frontier (PPF: maximum amount of
goods that can be produced with a fixed amount of resources)
PPF can be driven by the full employment condition:

where QW and QC: production of wine and cheese at home.

The slope of PPF measures the opportunity
cost of cheese in terms of wine (aC/aW).
Among many points on this PPF, which
point will be actually produced by this
economy?

absolute value of the

slope:

International Trade: Theory and Policy Analysis, Prepared by Prof. Yong-Seok Choi

Iso-revenue curve (or GDP curve: mixture of goods that gives

the same level of revenue when prices are fixed)
Iso-revenue curve can be driven as:

where PW and PC :prices of wine and

cheese at home.

absolute value of the

slope:

The slope of the iso-revenue curve measures

the relative price of cheese in terms of wine (PC/PW).
Given technology structure (represented by PPF), this
economy will maximize its total revenue, R.
Depending on the relative price ratio, we will have the
following three cases.
International Trade: Theory and Policy Analysis, Prepared by Prof. Yong-Seok Choi

Case 1

Case 2

Case 3

PC /Pw > aC/aW

PC /Pw = aC/aW

PC /PW < aC/aW

Relative market

Relative market

Relative market

price of cheese is

price of cheese is

price of cheese is

higher than its

the same as its

lower than its

opportunity cost

opportunity cost

opportunity cost

Specialization in
cheese production

Any point could be

produced

Specialization in
wine production

International Trade: Theory and Policy Analysis, Prepared by Prof. Yong-Seok Choi

In autarky where trade is not allowed, both goods have to be

produced since consumers want to consume both goods.
Thus only case 2 can be the relevant autarky equilibrium
(where the relative price of a good must be equal to its
opportunity cost).
Also note that in autarky the relative price of goods are
determined only by technology structure.

International Trade: Theory and Policy Analysis, Prepared by Prof. Yong-Seok Choi

10

 All the analyses so far could be directly applied to Foreign as

well.
Without loss of generality, let
The opportunity cost of producing cheese in terms of wine is
lower at Home than in Foreign, which means Home has a
comparative advantage in producing cheese.
Home

Foreign

International Trade: Theory and Policy Analysis, Prepared by Prof. Yong-Seok Choi

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