Course II - Section I - DR - Kanyarat Nimtrakool

Section I
2nd – 6th Nov
Kanyarat Nimtrakool (Ph.D.)
Course II - Nov 3rd, 2020

Course Progress - Section I
Course 1. Gains from trade and the law of comparative advantage
Course 2. The Ricardian model
Course 3. The Ricardo-Viner and Heckscher-Ohlin models
Course 4. Supply Chains and Urban Logistics Platforms
Course 5. Identifying the Need for Freight to be Included in Local

Authority Transport Planning: Comparative French and Thai Cases
Course II - Nov 3rd, 2020 2

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THE RICARDIAN
MODEL
Kanyarat Nimtrakool (Ph.D.)
November 3rd, 2020
- Course II -
Outline Class II
❖ The reasons of trade

❖The Ricardian Model

The Reasons of Trade
Reason for Trade #1: Differences in Technology
❖ Advantageous trade can occur between countries if the
countries differ in their technological abilities to produce goods
and services.
❖ Technology refers to the techniques used to turn resources
(labor, capital, land) into outputs (goods and services).
❖ The basis for trade in the Ricardian model of comparative
advantage in "The Ricardian Theory of Comparative
Advantage" is differences in technology.

Reason for Trade #2: Differences in Resource Endowments
❖ Advantageous trade can occur between countries if the
countries differ in their endowments of resources.
❖ Resource endowments refer to the skills and abilities of a
country’s workforce, the natural resources available within its
borders (minerals, farmland, etc.), and the sophistication of its
capital stock (machinery, infrastructure, communications
systems).
❖ The basis for trade in “the Heckscher-Ohlin model" is
differences in resource endowments.
Reason for Trade #3: Differences in Demand
❖ Advantageous trade can occur between countries if demands
or preferences differ between countries.
❖ Individuals in different countries may have different
preferences or demands for various products.
❖ For example, the Chinese are likely to demand more rice than
Americans, even if consumers face the same price. Canadians
may demand more beer, the Dutch more wooden shoes, and
the Japanese more fish than Americans would, even if they all
faced the same prices.
❖ There is no formal trade model with demand differences.
Reason for Trade #4: Existence of Economies of Scale in Production
❖ The existence of economies of scale in production is

sufficient to generate advantageous trade between
two countries.
❖ Economies of scale refer to a production process in
which production costs fall as the scale of production
rises.
❖ This feature of production is also known as “increasing
returns to scale.” Course II - Nov 3rd, 2020 9
Reason for Trade #5: Existence of Government Policies
❖ Government tax and subsidy programs alter the prices charged
for goods and services.
❖ These changes can be sufficient to generate advantages in
production of certain products.
❖ In these circumstances, advantageous trade may arise solely
due to differences in government policies across countries.

To conclude
1) Technology
5) Existence of
2) Resource
Government
Endowments
Policies
Differences
in
4) Existence of
Economies of
3) Demand
Scale in
Production Course II - Nov 3rd, 2020 11
Summary
❖ There are very few models of trade that include all five
reasons for trade simultaneously.
❖ The reason is that such a model is too complicated to
work with.
❖ Economists simplify the world by choosing a model
that generally contains just one reason.
❖ This does not mean that economists believe that one
reason, or one model, is sufficient to explain all
outcomes.
Summary
❖ Instead, one must try to understand the world by
looking at what a collection of different models
tells us about the same phenomenon.
❖ For example:
❖ the Ricardian model of trade, which incorporates
differences in technologies between countries,
concludes that everyone benefits from trade, whereas
the Heckscher-Ohlin model, which incorporates
endowment differences, concludes that there will be
winners and losers from trade.
❖ Change the basis for trade and you may change the
outcomes from trade. Course II - Nov 3rd, 2020 13
In the real world,
❖ trade takes place because of a combination of all
these different reasons.
❖ Each single model provides only a glimpse of some of
the effects that might arise.
❖ Consequently, we should expect that a combination of
the different outcomes that are presented in different
models is the true characterization of the real world.
❖ Unfortunately, because of this, understanding the
complexities of the real world is still more of an art
than a science.
Reason for Trade #1: Differences in Technology
Technology? Two aspects:
❖ Absolute advantage
When a country has the best technology for
producing a good.
❖ Comparative advantage
A country has a comparative advantage in producing
those goods that it produces best compared with how
well it produces other goods.
Reason for Trade #1:
The Reasons of Trade Differences in Technology
Comparative advantage
May depend both on technics and resources
For example: While Napa has a comparative advantage

in growing regular grapes, Canada now has a
comparative advantage in making “ice wine”.
Reason for Trade #1:
The Reasons of Trade Differences in Technology
Leads to different models:
1) Ricardian model focuses on differences in technology
2) Heckscher-Ohlin model focuses on differences in
resource endowments
3) Specific-factor model is a mixture of the two models
4) Krugman model focuses product differentiation
(product-level specialization)

Differentiation between the Ricardian
model & the Heckscher-Ohlin model
❖ The Ricardian model examines differences in the

productivity of labor (due to differences in
technology) between countries.
❖ The Heckscher-Ohlin model examines differences in
labor, labor skills, physical capital, land, or other
factors of production between countries.

The
Ricardian
Model
focuses on
differences in
technology

David Ricardo (1772-1823) and Mercantilism
Mercantilism’s ideas:
❖ Exporting is “good” : generates gold and silver for the
national treasury.
❖ Importing is “bad” because it drained gold and silver.
→ Mercantilists were in favor of high tariffs to obtain low
imports and high exports.
→ This theory does not account for general-equilibrium
effects.
Instead, Ricardo shows that countries can benefit from
balanced international trade without having tariffs.
Comparative advantage and
Opportunity cost
❖ The Ricardian model uses the concepts of opportunity
cost and comparative advantage.
❖ The opportunity cost of producing something measures
the cost of not being able to produce something else with
the resources used.
❖ For example, a limited number of workers could produce
either roses or computers.
❖ The opportunity cost of producing computers is the amount
of roses not produced.
❖ The opportunity cost of producing roses is the amount of
computers not produced.
Opportunity cost
❖ Suppose that in the US 10 million roses could be
produced with the same resources as 100,000
computers.
❖ Suppose that in Colombia 10 million roses could be
produced with the same resources as 30,000
computers.
❖ Colombia has a lower opportunity cost of producing
roses: has to stop producing fewer computers.
Source : Pearson Education, Inc. (2015) Course II - Nov 3rd, 2020 22

Opportunity cost
Table 1: Production Possibilities for the same amount of time
Million Roses Thousand Computers
US 10 100
Colombia 10 30
Opportunity cost of producing roses :
❖ US 1 produced rose = 10 computers.
❖ Colombia 1 produced rose = 3 computers.
Colombia has a lower opportunity cost of producing rose (3<10)
Opportunity cost
❖ A country has a comparative advantage in producing a
good if the opportunity cost of producing that good is
lower in the country than in other countries.
❖ Colombia has a comparative advantage in rose production.
❖ The US has a comparative advantage in computer
production.
❖ Suppose initially that Colombia produces computers
and the US produces roses, and that both countries
want to consume computers and roses.
❖ Can both countries be made better off?
Opportunity cost
❖ Hypothetical Changes in Production
Table 2: Production with Specialization

Million Roses Thousand Computers
US -10 +100
Colombia +10 -30
Total 0 Course II - Nov 3rd, 2020
+70 25
Source : Pearson Education, Inc. (2015)
Opportunity cost
❖ When countries specialize in production in which they
have a comparative advantage, more goods and
services can be produced and consumed.
❖ Have the US stop growing roses and use those
resources to make 100,000 computers instead.
❖ Have Colombia stop making 30,000 computers and
grow roses instead.
❖ If produce goods in which have a comparative advantage
(the US produces computers and Colombia roses), they
could still consume 10 million roses, but could consume
100,000 – 30,000 = 70,000 more computers.
A One-Factor Ricardian Model
❖ The simple example with roses and computers
explains the intuition behind the Ricardian model.
❖ We formalize these ideas by constructing a one-
factor Ricardian model using the following
assumptions:
1) Labor is the only factor of production.
2) Labor productivity varies across countries due to
differences in technology, but labor productivity in each
country is constant.
3) The supply of labor in each country is constant.

❖ We formalize these ideas by constructing a
one-factor Ricardian model using the
following assumptions:
4) Two goods: wine and cheese.
5) Competition allows workers to be paid a wage
equal to the value of what they produce, and
allows them to work in the industry that pays
the highest wage.
6) Two countries: home and foreign.
❖ A unit labor requirement indicates the constant
number of hours of labor required to produce one unit
of output.
❖ aLC is the unit labor requirement for cheese in the home
country. For example, aLC = 1 means that 1 hour of labor
produces one pound of cheese in the home country.
❖ aL𝑊 is the unit labor requirement for wine in the home
country. For example, aL𝑊 =2 means that 2 hours of labor
produces one gallon of wine in the home country.
❖ A high unit requirement means low labor productivity.

❖ Labor supply L indicated the total number of
hours worked in the home country (a
constant number).
❖ Cheese production 𝑄𝐶 indicates how many
pounds of cheese are produced.
❖ Wine production 𝑄𝑊 indicates how many
gallons of wine are produced.

Production Possibilities
❖ The production possibility frontier (PPF) of an economy
shows the “maximum amount of a good that can be
produced for a fixed amount of resources.
❖ The production possibility frontier of the home economy is :

Production Possibilities (cont.)
❖ Maximum home cheese production is
❖ Maximum home wine production is

❖ For example, suppose that the economy s labor supply is
1,000 hours.
❖ The PPF equation
Becomes
❖ Maximum cheese production is 1,000 pounds.
❖ Maximum wine production is 500 gallons.

Home’s
Production
Possibility
Frontier (PPF)

❖ The opportunity cost of cheese is how many gallons of wine
Home must stop producing in order to make one more
pound of cheese:
❖ The cost is constant because the unit labor requirements are

both constant.
❖ The opportunity cost of cheese appears as the absolute
value of the slope of the PPF.

❖ Producing an additional pound of cheese requires 𝑎𝐿𝐶
hours of labor.
❖ Each hour devoted to cheese production could have
been used instead to produce an amount of wine
equal to

❖ For example, if 1 hour of labor is moved to cheese
production, that additional hour could have
produced.
1 hour/(2 hours/gallon of wine)
= ½ gallon of wine.
❖ Opportunity cost of producing one pound of cheese
is ½ gallon of wine not produced.

Relative Price, Wages, and Supply
❖ Let 𝑃𝐶 be the price of cheese and 𝑃𝑊 be the price of
wine.
❖ Due to competition,
❖ hourly wages of cheese makers equal the value of the
cheese produced in an hour: 𝑃𝐶 / aL𝐶
❖ Hourly wages of wine makers equal the value of the
wine produced in an hour: 𝑃𝑊 / aLW
❖ Workers will choose to work in the industry that pays
the higher wage.
(cont.)
❖ If the price of cheese relative to the price of wine
exceeds the opportunity cost of producing cheese
𝑃𝐶 / 𝑃𝑊 > aL𝐶 /aLW
❖ Then the wage in cheese will exceed the wage in
wine w𝐶 = 𝑃𝐶 / aL𝐶 > 𝑃𝑊 /aLW = 𝑤w
❖ So workers will make only cheese (the economy
specializes in cheese production).

(cont.)
❖ If the price of cheese relative to the price of wine is
less than the opportunity costs of producing cheese
𝑃𝐶 / 𝑃𝑊 < aL𝐶 /aLW
❖ Then the wage in cheese will exceed the wage in
wine w𝐶 = 𝑃𝐶 / aL𝐶 < 𝑃𝑊 /aLW
❖ So workers will make only wine (the economy
specializes in wine production).

(cont.)
❖ If the price of cheese relative to the price of wine
equals the opportunity costs of producing cheese
𝑃𝐶 / 𝑃𝑊 = aL𝐶 /aLW
❖ Then the wage in cheese equals the wage in wine
𝑃𝐶 / aL𝐶 = 𝑃𝑊 /aLW
❖ So workers will be willing to make both wine and
cheese.

(cont.)

(cont.)

(cont.)

Trade in the Ricardian Model

❖ A country can be more efficient in producing

both goods, but it will have a comparative
advantage in only one good.
❖Even if a country is the most (or least) efficient
producer of all goods, it still can benefit from
trade.

❖ Suppose that the home country has a comparative
advantage in cheese production: its opportunity cost of
producing cheese is lower than in the foreign country.
❖ When the home country increase cheese production, it

reduces wine production less than the foreign country
would.

❖Since the slope of the PPF indicates the opportunity
cost of cheese in terms of wine,
Foreign’s PPF is steeper than Home’s
❖ To produce one pound of cheese, must stop producing
more gallons of wine in Foreign than in Home.

Foreign’s
Production
Possibility
Frontier

❖Before any trade occurs, the relative price of cheese to
wine reflects the opportunity cost of cheese in terms of
wine in each country.
❖In the absence of any trade, the relative price of cheese
to wine will be higher in Foreign than in Home if Foreign
has the higher opportunity cost of cheese.
❖It will be profitable to ship cheese from Home to
Foreign (and wine from Foreign to Home) – where does
the relative price of cheese to wine settle?
❖ To see how all countries can benefit from trade,
need to find relative prices when trade exists.
❖First calculate the world relative supply of
cheese: the quantity of cheese supplied by all
countries relative to the quantity of wine supplied
by all countries

The Ricardian Model
❖ To develop a Ricardian model of trade, we will use
an example with two goods: wheat and cloth.
❖ Wheat and other grains are major exports of the U.S.
and Europe.
❖ Many types of cloth are imported into these countries.
❖ Home will be the country exporting wheat and
importing cloth.
❖ Assume that labor is the only factor of production.
❖ Note that the model has two goods and one factor
of production.
The Ricardian Model
❖ The Home Country (the country exporting wheat and
importing cloth)
❖ One worker can produce 4 bushels of wheat or 2 yards of
cloth.
❖ The Marginal Product of Labor (MPL) is the extra output
obtained by using one more unit of labor
❖ MPLw = 4 and MPLc = 2.
❖ We can use the marginal products of labor (MPL) to construct
Home’s Production Possibilities Frontier (PPF)
❖ The PPF shows all feasible combinations of wheat and cloth.
❖ Assume there are 25 workers in Home.
The Ricardian Model
❖ Assume there are 25 workers in Home.
❖ Using the setup, we can show:
❖ Labor (L) = 25, MPLw = 4, MPLc = 2
❖ Q w = MPLw ∗ L = 25 ∗ 4 = 100
❖ Q c = MPLc ∗ L = 25 ∗ 2 = 50
❖ This gives us a straight line PPF which is a unique feature
of the Ricardian model.
❖ It assumes the marginal products of labor (MPL) are
constant.
❖ The slope also equals the opportunity cost of wheat – the
amount of cloth that must be given up to obtain one more
unit of wheat.
❖ It is the ratio of the marginal products.
The Ricardian Model

The Ricardian Model
❖ Home Indifference Curve
❖ Given Home’s PPF, how much wheat and cloth will home
actually produce. The answer depends on demand.
❖ Demand can be represented with indifference curve.
❖ An indifference curve shows the combinations of two
goods that the country can consume and be equally
satisfied.
❖ All points on an indifference curve have the same level of
utility.
❖ Points on higher indifference curves have higher utility.
The Ricardian Model

The Ricardian Model
❖ Home Equilibrium
❖ Without trade, the PPF acts as a budget constraint
for the country.
❖ With perfectly competitive markets, the country will
produce at its highest level of utility within the limits
of the PPF.
❖ In the graph, the highest level of utility that can be
reached and still stay within the PPF is U1 with
production at point A.
❖ Refer to this as the no-trade equilibrium.
The Ricardian Model
❖ Opportunity Cost and Prices
❖ The slope of the PPF reflects the opportunity of
producing one more bushel of wheat.
❖ Under perfect competition the opportunity cost of
wheat should equal the price of wheat.
❖ Price reflects the opportunity cost of a good.

The Ricardian Model
❖ Wages
❖ Determination of wages
❖ In competitive markets firms hire workers up to the
point at which the hourly wage equals the value of one
more hour of production.
❖ Wage = P*MPL for each industry
❖ In competitive markets, labor can move freely
between industries
❖ Wages must be equal across industries.

The Ricardian Model
❖ Wages
❖ Equalization of wages implies that:
𝑃𝑊 = 𝑀𝑃𝐿𝑊 = 𝑃𝐶 ∗ 𝑀𝑃𝐿𝐶
𝑃𝑊 𝑀𝑃𝐿𝐶
=
𝑃𝐶 𝑀𝑃𝐿𝑊
❖ This is the relative price of wheat.

❖ Cost of wheat in terms of cloth.

The Ricardian Model
❖ The Foreign Country
❖ Assume Foreign’s technology is inferior to Home’s
❖ Foreign has an absolute disadvantage in producing
both wheat and cloth as compared to Home.
❖ Foreign Production Possibilities Frontier
❖ Assume a Foreign worker can produce one bushel of
wheat or one yard of cloth
❖ MPL∗W = 1, MPL∗C = 1
❖ Assume there are 100 workers available in Foreign

The Ricardian Model

The Ricardian Model
❖ Comparative Advantage
❖ Given the opportunity cost information, we can determine
comparative advantages in each country for each goods.
❖ The table below shows the opportunity cost of each goods for
both countries:
Cloth Wheat
(1 Yard) (1 Bushel)
Home 2 Bushels of Wheat ½ Yard of Cloth
Foreign 1 Bushel of Wheat 1 Yard of Cloth

The Ricardian Model
❖ Comparative Advantage
❖ A country has a comparative advantage in a good
when it has a lower opportunity cost of production
than another country.
❖ By looking at the chart we can see that Foreign has a
comparative advantage in producing cloth.
❖ Foreign’s Opportunity cost of cloth is lower.
❖ Home has a comparative advantage in producing
wheat.
❖ Home’s opportunity cost of wheat is lower.
The Ricardian Model
❖ Equilibrium in Foreign
❖ Foreign’s preferences can also be represented by an
indifference curve.
❖ ∗
The no-trade relative price of wheat is PW / PC∗ = 1.
❖ The relative price exceeds Home’s no-trade relative
∗ ∗ 1
price of wheat: PW / PC = .
2
❖ The difference in relative prices comes from the
comparative advantage that Home has in wheat.
❖ Shortly, we will show how these differences can form
the basis for trade.
The Ricardian Model

Problem – Application II
Question 1

Problem – Application II
From PPT page 42
Question 2
Cheese sells for Pc = $16/ pound and wine sells for Pw = $23 / gallon
Show the calculation and what will the worker decide?
Question 3
Cheese sells for Pc = $15/ pound and wine sells for Pw = $17 / gallon
Show the calculation and what will the worker decide?

Submitting your work - Problems and
Applications I
1) Type your answer by using Microsoft Word.
2) Save the answer sheet by using this name: Course2-Firstname-Family
name
For example: Course2-Kanyarat-Nimtrakool
3) Submitting your answers sheet through:
https://forms.gle/mqwtToFWpyXZu8sv7 or QR CODE
4) Deadline of submission : until November 5th 2020
70
LinkedIn
linkedin.com/in/kanyaratnimtrakool
Academia
https://rmutto.academia.edu/Kanyarat
Nimtrakool
Thank You
Email
kanyarat_ni@rmutto.ac.th
Phone
66 (0) 63 156 5600
71

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Section I

2nd – 6th Nov

Kanyarat Nimtrakool (Ph.D.)

Course II - Nov 3rd, 2020

Course 1. Gains from trade and the law of comparative advantage

Course 2. The Ricardian model

Course 3. The Ricardo-Viner and Heckscher-Ohlin models

Course 4. Supply Chains and Urban Logistics Platforms

Course 5. Identifying the Need for Freight to be Included in Local

Course II - Nov 3rd, 2020 2

If you use Line

Course II - Nov 3rd, 2020 3

❖ The reasons of trade

Course II - Nov 3rd, 2020 5

Course II - Nov 3rd, 2020 6

❖ The existence of economies of scale in production is

Course II - Nov 3rd, 2020 10

For example: While Napa has a comparative advantage

Course II - Nov 3rd, 2020 17

❖ The Ricardian model examines differences in the

Course II - Nov 3rd, 2020 18

Course II - Nov 3rd, 2020 19

Source : Pearson Education, Inc. (2015) Course II - Nov 3rd, 2020 22

❖ Hypothetical Changes in Production

Table 2: Production with Specialization

Source : Pearson Education, Inc. (2015) Course II - Nov 3rd, 2020 27

Source : Pearson Education, Inc. (2015) Course II - Nov 3rd, 2020 29

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Source : Pearson Education, Inc. (2015) Course II - Nov 3rd, 2020 31

❖ Maximum home wine production is

Source : Pearson Education, Inc. (2015) Course II - Nov 3rd, 2020 32

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❖ The cost is constant because the unit labor requirements are

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❖ A country can be more efficient in producing

Source : Pearson Education, Inc. (2015) Course II - Nov 3rd, 2020 46

❖ When the home country increase cheese production, it

Source : Pearson Education, Inc. (2015) Course II - Nov 3rd, 2020 47

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❖ This is the relative price of wheat.

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Home 2 Bushels of Wheat ½ Yard of Cloth

Foreign 1 Bushel of Wheat 1 Yard of Cloth

Course II - Nov 3rd, 2020 64