Comparative advantage in many goodsRadoslav JakubčoDávid Žitňanský

Model• We have a model with two countries – home (a)

and foreign (a*)• Just one production factor= labor• Both countries produce N products (1,...,N)• Labor – amount of hours (L) to produce one unit

(i) Označenie: • Home´s unit labor requirement for particular

good is aLi

• Foreign´s unit labor requirement for particular good is a*Li

•Costs of production (i) in home is waLi and in foreign is wa*Li

•When: waLi < w*a*Li ; a*Li /aLi > w/w*, it will be produced in home

•On the other hand: waLi > w*a*Li ; a*Li/aLi < w/w*, it will be produced foreign

ProblemGood Home unit

labor aLi

Foreign unit labor

a*Li

Relative home production advantege

a*Li/ aLi

Tanks 2 24 12

Fighter Jets 3 27 9

Helicopters 8 40 5

Cuison vehicles 10 30 3

Submarines 15 12 0,8

Solution(part1)Asume that wage at home is higher a) 8 timesb) 5,5 times

w/w*c) 8 / 1 = 8d) 5,5 / 1 = 5,5Which products should be made in home in a) and b)

a*Li/aLi > w/w*

a. 12 > 8 ; 9 > 8b. 12 > 5,5 ; 9 > 5,5

From the calculation we can see that home will produce:Z výpočtu vyplýva, že domáca krajina má nákladovú výhodu vo výrobe:

a) Tanks and fighter jetsb) Tanks and fighter jets

Which means that all other goods will be IMPORTED from Foreign

Foreign has better productivity with lower wages for these goods:

A. Helicopters: costs will be 40/5,5=7,2727 hours while in home it was 8

B. Cuison Vehicles: costs just 40/5,5=7,2727 while in home it was 10

C. Submarines: costs will be 12/5,5=2,1818 while in home it was 15

Determine the relative wage with more goods

• When determing the relative wage in economy with more goods we need to find out the relative demand for product and the relative demand for labor

Reasons of decrease in relative demand for labor: • Home wage is higher than in foreign – home

products are more expensive – demand for them in foreign decrease

• Higher wage at home – lower production at home – lower demand for labor

Solution (part 2)• At home the wage is 5,5 times higher than in

foreign – so it prodeces only tanks fighter jets • If the wage will be 8,8 times higher – the

specialization of the market will not change

Lower: Relative demand for products Demand for labor

Imagine the wage in home will rise 9,1 times what will happen? -Home will stop producing fighter jets as it will be more efficient to import them-Foreign will produce it

Assume that wage will rise 12,1 times – all goods will be made by foreign country

Ricardian model of more goods for determination of relative wage (determined by the intersection of the dericated relative demand curve for Labor and relative supply

Relative quantity of labor L/L*

Relative Wage ratew/w*

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