Chapter 6: The Causes of International Trade

6.1. The No-Trade Model

countries gain from trade by importing what is relatively costly to produce at home and
by exporting what is produced relatively cheaply (efficiently) at home
NO TRADE - if all autarky price ratios were identical and there were no scale economies
1. all countries have identical, convex production sets and in which the same set of
community indifference curves
On the demand side it is sufficient to assume that identical and homogeneous tastes exist
throughout the world
On the production side three conditions determine the position and shape of the
production possibility curve
1. degree of homogeneity
2. factor endowments
3. production functions
equilibrium prices are determined by the tangency between the highest community
indifference curve and the production possibility curve (Fig 6.1), and to ensure this we
assume that there are no distortions in the model (taxes, subsidies, and imperfect
competition)

5 conditions for a no-trade situation:

1. Identical production functions among countries
2. Same relative endowments in all countries
3. Constant returns to scale
4. Identical and homogeneous tastes in all countries
5. Absence of distortions (taxes, subsidies, imperfect competition)
The 5 conditions can therefore be thought of as the five broadly defined determinants of,
or bases for, trade.
If any one of the five conditions is relaxed, a situation will arise in which trade will be
possible.
while this set of assumptions will guarantee no trade, it is not the only set of assumptions
that will do so (Fig 6.2)
 Production conditions are clearly different in the two countries, with H producing
relatively more Y and F relatively more X at any common price ratio.
Demand conditions also differ, however, and in the situation shown, these differences are
just enough to offset the production conditions, leaving autarky prices identical.

6.2. Some Methodological Considerations

assumption that two countries have only one basis for trade (only one of the five
conditions fails to hold) is made for the purposes of understanding that basis' individual
contributions to determining trade
empirical analysis - to determine the quantitative importance of the five bases for trade

Chapter 7: Differences in Technology

7.1. A Simple Model of Production Function Differences
first model we consider is one in which production functions (technologies) differ across
countries
David Ricardo
assume that labor is the only factor of production
By differences in technology, we mean that the amount of output that can be obtained
from one unit of labor differs across countries
with one factor, the issue of differences in relative endowments does not arise.
Assume that there is constant returns to scale
a one-factor model with constant returns will have a linear production possibility frontier.
no distortions such as imperfect competition or taxes, and tastes are identical and
homogeneous

7.2. Absolute and Comparative Advantage

Ricardian model assumes that labor is the only constraint on the production process
production functions and the labor constraint
 a and are some positive constants
a and are the marginal products of labor in industries X and Y respectively: a and
give the additional outputs obtained from one unit of labor

F is said to have an absolute advantage in the production of X: h < f

H is said to have an absolute advantage in the production of Y: h > f