ECON 2DO3 Trade and Technology: The Ricardian Model CHAPTER 2

Reasons countries trade goods with each other include: ■ Differences in the technology used in each country (i.e., differences in each country’s ability to manufacture products) ■ Differences in the total amount of resources (including labor, capital, and land) found in each country ■ Differences in the costs of offshoring (i.e., producing the various parts of a good in different countries and then assembling it in a final location) ■ The proximity of countries to each other (i.e., how close they are to one another) In this chapter, we focus on technology differences across countries as an explanation for trade. This explanation is often called the Ricardian model. This model explains how the level of a country’s technology affects wages and, in turn, helps to explain how a country’s technology affects its trade pattern. We also explain the concept of comparative advantage and why it works as an explanation for trade patterns. Proximity • The closer countries are the lower the costs of transportation. For example, the largest trading partner of Canada is the United States, and then Mexico. • Sometimes neighboring countries take advantage of their proximity by joining into a free-trade area, in which the countries have no restrictions on trade between them. We are having a big trouble in the research of trade: we need to impute a gigantic trade cost in order to have models that work… more research is needed! You could figure out the answer! Resources Geography includes the natural resources (such as land and minerals) found in a country, as well as its labor resources (labor of various education and skill levels) and capital (machinery and structures). A country’s resources are often collectively called its factors of production, the land, labor, and capital used to produce goods and services. We are currently starting a project with Jose Asturias (Georgetown-Qatar), Wyatt J. Brooks (Notre Dame), Timothy J. Kehoe (Minnesota) in order to assess the differences between typical rich countries (Canada), and natural-resource rich countries (Qatar) in terms of welfare gains from trade… next year I will explain more! Absolute Advantage When a country has the best technology for producing a good, it has an absolute advantage in the production of that good. Comparative Advantage Absolute advantage is not a good explanation for trade patterns. Instead, comparative advantage is the primary explanation for trade among countries. A country has comparative advantage in producing those goods that it produces best compared with how well it produces other goods. What is technology, really? SIDE BAR David Ricardo and Mercantilism • Mercantilists believed that exporting was good because it generated gold and silver for the national treasury and that importing was bad because it drained gold and silver from the national treasury. • To ensure that a country exported a lot and imported only a little, the mercantilists were in favor of high tariffs. • Ricardo was interested in showing that countries could benefit from international trade without having to use tariffs. • Many of the major international institutions in the world today are founded at least in part on the idea that free trade between countries brings gains for all trading partners. What is a model? Now we are going to get serious: What is a model? Now we are going to get serious: we will describe a model What is a model? Now we are going to get serious: we will describe a model What is a model?