Chapter 3: Ricardian Model – Labor Productivity and Comparative Advantage

What is the core assumption of the Ricardian model?

Labor is the only production factor and productivity differs across countries

What is opportunity cost?

The amount of one good that must be given up to produce another

When does a country have comparative advantage?

When it has a lower opportunity cost in producing a good than another country

What does specialization based on comparative advantage lead to?

Higher global output and potential gains from trade for all countries

How are wages determined in the Ricardian model?

Based on labor productivity: higher productivity leads to higher wages.

How is relative wage calculated between countries?

As the ratio of wage levels, reflecting relative productivity

What are common myths about trade addressed by the model?

Myth 1: Only strong countries benefit.

Myth 2: Low wages are unfair.

Myth 3: Trade exploits workers in low-wage countries

What are the effects of trade on consumption possibilities?

Trade allows countries to consume beyond their production possibilities frontier (PPF)

How does the model explain multigood trade?

Countries specialize in goods where they have the highest productivity advantage

What are transport costs' effects on trade?

High transport costs can make some goods non-tradable

What does empirical evidence (e.g. Balassa 1963) show about the Ricardian model?

Even countries with lower absolute productivity can export due to comparative advantage