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International trade and investment lecture 2
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International trade and investment lecture Krugman, P.R., Obstfeld, M. and Melitz, M.J. (2018), International Trade. Theory and Policy, 11th edition Week 1
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Welfare of the world as a whole increases as welfare of both nations increases. Hence,international trade is not a zero-sum game (zero-sum game = what the one wins, the other
loses).
Reason: more efficient allocation of labour, namely there where productivity is highest.
The relative wage must reflect differences in productivity. Higher productivity means higher
wage.
Against misconceptions:
- Comparative productivity advantages are relevant and the relative wage will turn
comparative productivity advantages into cost advantages. The resulting trade will
increase the consumption possibilities and welfare in both countries.
- The relative wage will turn comparative productivity advantages into cost
advantages. The resulting trade yields an expansion of consumption possibilities for
all countries when compared to the situation under autarky.
- The unequal exchange of labour may happen, but it is not relevant since international
trade allows labour to be utilised in such a manner that consumption possibilities in
both countries rise. Moreover, real wages would even be lower in the exporting
nation if that nation would not participate in international trade.
Extension of the model of Ricardo 1: multigood model or N-good model
1. Order the N goods of the two countries in terms of their relative unit labour
requirements.
2. Translate the relatively productivity differences into cost advantages in
order to determine which country will produce which of the N goods under
international trade and thus which country export which of the N goods. →
relative wages
- Good 1 will be produced in Home if it is cheaper than making 1 in Foreign, so
w w
a∗L1 it will be produced in Foreign if a∗L1
w∗¿< ¿ w∗¿> ¿
aL1 aL1
The demand of labour is derived from the demand of goods.
A increase in price, L/L* will decrease.
At price 4 the production costs of caviar are equal in F and H, so it can be produced in both
countries.
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