国际贸易与金融II(双语)课程M03-Krugman-46657-09-IE-C03-F

Chapter3LaborProductivity

andComparativeAdvantage:TheRicardianModelPreviewOpportunitycostsandcomparativeadvantageAone-factorRicardianmodelProductionpossibilitiesGainsfromtradeWagesandtradeMisconceptionsaboutcomparativeadvantageTransportationcostsandnon-tradedgoodsEmpiricalevidence2IntroductionTheoriesofwhytradeoccurs:Differencesacrosscountriesinlabor,laborskills,physicalcapital,naturalresources,andtechnologyEconomiesofscale(largerscaleofproductionismoreefficient)3Introduction(cont.)Sourcesofdifferencesacrosscountriesthatleadtogainsfromtrade:TheRicardianmodel(Chapter3)examinesdifferencesintheproductivityoflabor(duetodifferencesintechnology)betweencountries.TheHeckscher-Ohlinmodel(Chapter4)examinesdifferencesinlabor,laborskills,physicalcapital,land,orotherfactorsofproductionbetweencountries.4ComparativeAdvantageandOpportunityCostTheRicardianmodelusestheconceptsofopportunitycostandcomparativeadvantage.Theopportunitycostofproducingsomething

measuresthecostofnotbeingabletoproducesomethingelsewiththeresourcesused.5ComparativeAdvantageandOpportunityCost(cont.)Forexample,alimitednumberofworkerscouldproduceeitherrosesorcomputers.Theopportunitycostofproducingcomputersistheamountofrosesnotproduced.Theopportunitycostofproducingrosesistheamountofcomputersnotproduced.6ComparativeAdvantageandOpportunityCost(cont.)SupposethatintheU.S.10millionrosescouldbeproducedwiththesameresourcesthatcouldproduce100,000computers.SupposethatinColombia10millionrosescouldbeproducedwiththesameresourcesthatcouldproduce30,000computers.WorkersinColumbiawouldbelessproductivethanthoseintheU.S.inmanufacturingcomputers.7ComparativeAdvantageandOpportunityCost(cont.)Colombiahasaloweropportunitycostofproducingroses.Colombiacanproduce10millionroses,comparedto30,000computersthatitcouldotherwiseproduce.TheU.S.canproduce10millionroses,comparedto100,000computersthatitcouldotherwiseproduce.8ComparativeAdvantageandOpportunityCost(cont.)TheU.S.hasaloweropportunitycostofproducingcomputers.Colombiacanproduce30,000computers,comparedto10millionrosesthatitcouldotherwiseproduce.TheU.S.canproduce100,000computers,comparedto10millionrosesthatitcouldotherwiseproduce.TheU.S.canproduce30,000computers,comparedto3.3millionrosesthatitcouldotherwiseproduce.9ComparativeAdvantageandOpportunityCost(cont.)Acountryhasacomparativeadvantageinproducingagoodiftheopportunitycostofproducingthatgoodislowerinthecountrythaninothercountries.TheU.S.hasacomparativeadvantageincomputerproduction.Colombiahasacomparativeadvantageinroseproduction.10ComparativeAdvantageandOpportunityCost(cont.)SupposeinitiallythatColombiaproducescomputersandtheU.S.producesroses,andthatbothcountrieswanttoconsumecomputersandroses.Canbothcountriesbemadebetteroff?11Table3-1:HypotheticalChangesinProduction12ComparativeAdvantageandTrade

Whencountriesspecializeinproductioninwhichtheyhaveacomparativeadvantage,moregoodsandservicescanbeproducedandconsumed.HaveU.S.stopgrowingrosesandusethoseresourcestomake100,000computersinstead.HaveColombiastopmaking30,000computersandgrowrosesinstead.Ifproducegoodsinwhichhaveacomparativeadvantage(U.S.producescomputersandColombiaroses),theycouldstillconsumethesame10millionroses,butcouldconsume100,000–30,000=70,000morecomputers.13AOne-FactorRicardianModelThesimpleexamplewithrosesandcomputersexplainstheintuitionbehindtheRicardianmodel.Weformalizetheseideasbyconstructingaone-factorRicardianmodelusingthefollowingassumptions:14AOne-FactorRicardianModel(cont.)Laboristheonlyfactorofproduction.Laborproductivityvariesacrosscountriesduetodifferencesintechnology,butlaborproductivityineachcountryisconstant.Thesupplyoflaborineachcountryisconstant.15AOne-FactorRicardianModel(cont.)Twogoods:wineandcheese.Competitionallowsworkerstobepaida“competitive”wageequaltothevalueofwhattheyproduce,andallowsthemtoworkintheindustrythatpaysthehighestwage.Twocountries:homeandforeign.16AOne-FactorRicardianModel(cont.)Aunitlaborrequirementindicatestheconstantnumberofhoursoflaborrequiredtoproduceoneunitofoutput.aLC

istheunitlaborrequirementforcheeseinthehomecountry.Forexample,aLC

=1meansthat1houroflaborproducesonepoundofcheeseinthehomecountry.aLW

istheunitlaborrequirementforwineinthehomecountry.Forexample,aLW

=2meansthat2hoursoflaborproducesonegallonofwineinthehomecountry.Ahighunitlaborrequirementmeanslowlaborproductivity.17AOne-FactorRicardianModel(cont.)LaborsupplyLindicatesthetotalnumberofhoursworkedinthehomecountry(aconstantnumber).

CheeseproductionQCindicateshowmanypoundsofcheeseareproduced.WineproductionQWindicateshowmanygallonsofwineareproduced.18ProductionPossibilitiesTheproductionpossibilityfrontier(PPF)ofaneconomyshowsthemaximumamountofagoodsthatcanbeproducedforafixedamountofresources.Theproductionpossibilityfrontierofthehomeeconomyis:aLCQC

+aLWQW

≤L

TotalgallonsofwineproducedLaborrequiredforeachpoundofcheeseproducedTotalpoundsofcheeseproducedLaborrequiredforeachgallonofwineproducedTotalamountoflaborresources19ProductionPossibilities(cont.)Maximumhomecheeseproductionis

QC

=L/aLC

whenQW=0.Maximumhomewineproductionis

QW=L/aLW

whenQC=0.20ProductionPossibilities(cont.)Forexample,supposethattheeconomy’slaborsupplyis1,000hours.ThePPFequationaLCQC

+aLWQW

≤LbecomesQC+2QW

≤

1,000.Maximumcheeseproductionis1,000pounds.Maximumwineproductionis500gallons.21Fig.3-1:Home’sProductionPossibility

Frontier

22ProductionPossibilities(cont.)TheopportunitycostofcheeseishowmanygallonsofwineHomemuststopproducinginordertomakeonemorepoundofcheese:

aLC/aLWThiscostisconstantbecausetheunitlaborrequirementsarebothconstant.TheopportunitycostofcheeseappearsastheabsolutevalueoftheslopeofthePPF.QW=L/aLW

–(aLC/aLW)QC

23ProductionPossibilities(cont.)ProducinganadditionalpoundofcheeserequiresaLC

hoursoflabor.Eachhourdevotedtocheeseproductioncouldhavebeenusedinsteadtoproduceanamountofwineequalto 1hour/(aLWhours/gallonofwine) =(1/aLW)gallonsofwine24ProductionPossibilities(cont.)Forexample,if1houroflaborismovedtocheeseproduction,thatadditionalhourcouldhave

produced 1hour/(2hours/gallonofwine) =½gallonofwine.Opportunitycostofproducingonepoundofcheeseis½gallonofwine.25RelativePrices,Wages,andSupplyLetPC

bethepriceofcheeseandPWbethepriceofwine.Duetocompetition,hourlywagesofcheesemakersequalthevalueofthecheeseproducedinanhour:PC/aLChourlywagesofwinemakersequalthevalueofthewineproducedinanhour:PW/aLWBecauseworkerslikehighwages,theywillworkintheindustrythatpaysthehigherwage.26RelativePrices,Wages,andSupply(cont.)IfthepriceofcheeserelativetothepriceofwineexceedstheopportunitycostofproducingcheesePC/PW>aLC/aLW,ThenthewageincheesewillexceedthewageinwinePC/aLC

>PW/aLWSoworkerswillmakeonlycheese(theeconomyspecializesincheeseproduction).27RelativePrices,Wages,andSupply(cont.)IfthepriceofcheeserelativetothepriceofwineislessthantheopportunitycostofproducingcheesePC/PW<

aLC/aLW,thenthewageincheesewillbelessthanthewageinwinePC/aLC

<PW/aLWsoworkerswillmakeonlywine(theeconomyspecializesinwineproduction).28Production,Prices,andWagesIfthepriceofcheeserelativetothepriceofwineequalstheopportunitycostofproducingcheesePC/PW=

aLC/aLW,thenthewageincheeseequalsthewageinwinePC/aLC

=PW/aLWsoworkerswillbewillingtomakebothwineandcheese.29Production,Prices,andWages(cont.)Forexample,supposecheesesellsforPC=$4/poundandwinesellsforPW=$7/gallon.WagepaidproducingcheeseisPC/aLC=($4/pound)(1pound/hour)=$4/hour.WagepaidproducingwineisPW/aLW=($7/gallon)(1/2gallon/hour)=$3.50/hour.Workerswouldbewillingtomakeonlycheese(therelativepriceofcheese4/7exceedstheopportunitycostofcheeseof½).30Production,Prices,andWages(cont.)IfthepriceofcheesedropstoPC=$3/pound:WagepaidproducingcheesedropstoPC/aLC=($3/pound)(1pound/hour)=$3/hour.Wagepaidproducingwineisstill

$3.50/hourifpriceofwineisstill$7/gallon.Nowworkerswouldbewillingtomakeonlywine(therelativepriceofcheese3/7isnowlessthantheopportunitycostofcheeseof½).31Production,Prices,andWages(cont.)Ifthehomecountrywantstoconsumebothwineandcheese(intheabsenceofinternationaltrade),relativepricesmustadjustsothatwagesareequalinthewineandcheeseindustries.

IfPC/aLC

=PW/aLW

workerswillhavenoincentiveto

worksolelyinthecheeseindustryorthewineindustry,sothatproductionofbothgoodscanoccur.Production(andconsumption)ofbothgoodsoccurswhentherelativepriceofagoodequalstheopportunitycostofproducingthatgood: PC/PW=aLC

/aLW32TradeintheRicardianModelSupposethehomecountryismoreefficientinwineandcheeseproduction.Ithasanabsoluteadvantageinallproduction:itsunitlaborrequirementsforwineandcheeseproductionarelowerthanthoseintheforeigncountry:

aLC

<a*LC

andaLW

<a*LW33TradeintheRicardianModel(cont.)Acountrycanbemoreefficientinproducingbothgoods,butitwillhaveacomparativeadvantageinonlyonegood.Evenifacountryisthemost(orleast)efficientproducerofallgoods,itstillcanbenefitfromtrade.34TradeintheRicardianModel(cont.)Supposethatthehomecountryhasacomparativeadvantageincheeseproduction:itsopportunitycostofproducingcheeseislowerthanintheforeigncountry.aLC

/aLW

<a*LC

/a*LW

where“*”notatesforeigncountryvariablesWhenthehomecountryincreasescheeseproduction,itreduceswineproductionlessthantheforeigncountrywould.35TradeintheRicardianModel(cont.)SincetheslopeofthePPFindicatestheopportunitycostofcheeseintermsofwine,Foreign’sPPFissteeperthanHome’s.Toproduceonepoundofcheese,muststopproducingmoregallonsofwineinForeignthaninHome.36Fig.3-2:Foreign’sProductionPossibilityFrontier

37TradeintheRicardianModel(cont.)Beforeanytradeoccurs,therelativepriceofcheesetowinereflectstheopportunitycostofcheeseintermsofwineineachcountry.Intheabsenceofanytrade,therelativepriceofcheesetowinewillbehigherinForeignthaninHomeifForeignhasthehigheropportunitycostofcheese.ItwillbeprofitabletoshipcheesefromHometoForeign(andwinefromForeigntoHome)–wheredoestherelativepriceofcheesetowinesettle?38TradeintheRicardianModel(cont.)Toseehowallcountriescanbenefitfromtrade,needtofindrelativepriceswhentradeexists.Firstcalculatetheworldrelativesupplyofcheese:thequantityofcheesesuppliedbyallcountriesrelativetothequantityofwinesuppliedbyallcountriesRS=(QC+Q*C

)/(QW+Q*W)39RelativeSupplyandRelativeDemandIftherelativepriceofcheesefallsbelowtheopportunitycostofcheeseinbothcountriesPC/PW<aLC

/aLW<a*LC

/a*LW,

nocheesewouldbeproduced.domesticandforeignworkerswouldbewillingtoproduceonlywine(wherewageishigher).40RelativeSupplyandRelativeDemand(cont.)WhentherelativepriceofcheeseequalstheopportunitycostinthehomecountryPC/PW=

aLC

/aLW<a*LC

/a*LW,

domesticworkers

areindifferent

aboutproducingwineorcheese(wagewhenproducingwinesameaswagewhenproducingcheese).foreignworkersproduceonlywine.41RelativeSupplyandRelativeDemand(cont.)WhentherelativepriceofcheesesettlesstrictlyinbetweentheopportunitycostsofcheeseaLC

/aLW<Pc/PW<

a*LC

/a*LW,domesticworkersproduceonlycheese(wheretheirwagesarehigher).foreignworkersstillproduceonlywine(wheretheirwagesarehigher).worldrelativesupplyofcheeseequalsHome’smaximumcheeseproductiondividedbyForeign’smaximumwineproduction(L/aLC)/(L*/a*LW).42RelativeSupplyandRelativeDemand(cont.)Whentherelativepriceofcheeseequalstheopportunitycostintheforeigncountry

aLC

/aLW<PC/PW=

a*LC

/a*LW,foreignworkersareindifferentaboutproducingwineorcheese(wagewhenproducingwinesameaswagewhenproducingcheese).domesticworkersproduceonlycheese.43RelativeSupplyandRelativeDemand(cont.)Iftherelativepriceofcheeserisesabovetheopportunitycostofcheeseinbothcountries

aLC

/aLW<a*LC

/a*LW<PC/PW,

nowine

isproduced.

homeandforeignworkersarewillingtoproduceonlycheese(wherewageishigher).44RelativeSupplyandRelativeDemand(cont.)Worldrelativesupplyisastepfunction:FirststepatrelativepriceofcheeseequaltoHome’sopportunitycostaLC

/aLW,whichequals1/2intheexample.JumpswhenworldrelativesupplyofcheeseequalsHome’smaximumcheeseproductiondividedbyForeign’smaximumwineproduction(L/aLC)/(L*/a*LW),whichequals

1intheexample.SecondstepatrelativepriceofcheeseequaltoForeign’sopportunitycosta*LC

/a*LW,whichequals2intheexample.45RelativeSupplyandRelativeDemand(cont.)Relativedemandofcheeseisthequantityofcheesedemandedinallcountriesrelativetothequantityofwinedemandedinallcountries.Asthepriceofcheeserelativetothepriceofwinerises,consumersinallcountrieswilltendtopurchaselesscheeseandmorewinesothattherelativequantitydemandedofcheesefalls.46Fig.3-3:WorldRelativeSupplyandDemand47GainsFromTradeGainsfromtradecomefromspecializinginthetypeofproductionwhichusesresourcesmostefficiently,andusingtheincomegeneratedfromthatproductiontobuythegoodsandservicesthatcountriesdesire.where“usingresourcesmostefficiently”meansproducingagoodinwhichacountryhasacomparativeadvantage.48GainsFromTrade(cont.)Domesticworkersearnahigherincomefromcheeseproductionbecausetherelativepriceofcheeseincreaseswithtrade.Foreignworkersearnahigherincomefromwineproductionbecausetherelativepriceofcheesedecreaseswithtrade(makingcheesecheaper)andtherelativepriceofwineincreaseswithtrade.49GainsFromTrade(cont.)Thinkoftradeasanindirectmethodofproductionthatconvertscheeseintowineorviceversa.Withouttrade,acountryhastoallocateresourcestoproduceallofthegoodsthatitwantstoconsume.Withtrade,acountrycanspecializeitsproductionandexchangeforthemixofgoodsthatitwantstoconsume.50GainsFromTrade(cont.)Consumptionpossibilitiesexpandbeyondtheproductionpossibilityfrontierwhentradeisallowed.Withtrade,consumptionineachcountryisexpandedbecauseworldproductionisexpandedwheneachcountryspecializesinproducingthegoodinwhichithasacomparativeadvantage.51Fig.3-4:TradeExpandsConsumptionPossibilities52ANumericalExampleWhatisthehomecountry’sopportunitycostofproducingcheese?aLC/aLW

=½,toproduceonepoundofcheese,stopproducing½gallonofwine.CheeseWineHomeaLC

=1hour/lbaLW

=2hours/gallonForeigna*LC=6hours/lba*LW=3hours/gallonUnitlaborrequirementsforhomeandforeigncountries53ANumericalExample(cont.)Thehomecountryismoreefficientinbothindustries,buthasacomparativeadvantageonlyincheeseproduction. 1/2=aLC/aLW

<a*LC/a*LW=2Theforeigncountryislessefficientinbothindustries,buthasacomparativeadvantageinwineproduction. 54ANumericalExample(cont.)Withtrade,theequilibriumrelativepriceofcheesetowinesettlesbetweenthetwoopportunitycostsofcheese.SupposethattheintersectionofRSandRDoccursatPC/PW

=1soonepoundofcheesetradesforonegallonofwine.Tradecausestherelativepriceofcheesetoriseinthehomecountryandfallinforeign.55ANumericalExample(cont.)Withtrade,theforeigncountrycanbuyonepoundofcheeseforPC/PW=onegallonofwine,insteadofstoppingproductionofa*LC/a*LW=2gallonsofwinetofreeupenoughlabortoproduceonepoundofcheeseintheabsenceoftrade.SupposeL*=3,000.Theforeigncountrycantradeits1,000gallonsmaximumproductionofwinefor1,000poundsofcheese,insteadofthe500poundsofcheeseitcouldproduceitself.56ANumericalExample(cont.)Withtrade,thehomecountrycanbuyonegallonofwineforPW/PC=onepoundofcheese,insteadofstoppingproductionofaLW/aLC

=twopoundsofcheesetofreeupenoughlabortoproduceonegallonofwineintheabsenceoftrade.Thehomecountrycantradeits1,000poundsmaximumproductionofcheesefor1,000gallonsofwine,insteadofthe500gallonsofwineitcouldproduceitself.57RelativeWagesRelativewagesarethewagesofthehomecountryrelativetothewagesintheforeigncountry.Productivity(technological)differencesdeterminerelativewagedifferencesacrosscountries.ThehomewagerelativetotheforeignwagewillsettleinbetweentheratioofhowmuchbetterHomeisatmakingcheeseandhowmuchbetteritisatmakingwinecomparedtoForeign.RelativewagescauseHometohaveacostadvantageinonlycheeseandForeigntohaveacostadvantageinonlywine.58RelativeWages(cont.)SupposethatPC

=$12/poundandPW=$12/gallon.Sincedomesticworkersspecializeincheeseproductionaftertrade,theirhourlywageswillbePC/aLC

=$12/1=$12Sinceforeignworkersspecializeinwineproductionaftertrade,theirhourlywageswillbePW/a*LW=$12/3=$4Therelativewageofdomesticworkersistherefore$12/$4=359RelativeWages(cont.)Therelativewageliesbetweentheratiooftheproductivitiesineachindustry.Thehomecountryis6/1=6timesasproductiveincheeseproduction,butonly3/2=1.5timesasproductiveinwineproduction.Thehomecountryhasawage3timeshigherthantheforeigncountry.60RelativeWages(cont.)Theserelationshipsimplythatbothcountrieshaveacostadvantageinproduction.Highwagescanbeoffsetbyhighproductivity.Lowproductivitycanbeoffsetbylowwages.Inthehomeeconomy,producingonepoundofcheesecosts$12(oneworkerpaid$12/hr)butwouldhavecost$24(sixpaid$4/hr)inForeign.Intheforeigneconomy,producingonegallonofwinecosts$12(threeworkerspaid$4/hr)butwouldhavecost$24(twopaid$12/hr)inHome.61RelativeWages(cont.)Becauseforeignworkershaveawagethatisonly1/3thewageofdomesticworkers,theyareabletoattainacostadvantageinwineproduction,despitelowproductivity.Becausedomesticworkershaveaproductivitythatis6timesthatofforeignworkersincheeseproduction,theyareabletoattainacostadvantageincheeseproduction,despitehighwages.62DoWagesReflectProductivity?Dorelativewagesreflectrelativeproductivitiesofthetwocountries?

Evidenceshowsthatlowwagesareassociatedwithlowproductivity.WageofmostcountriesrelativetotheU.S.issimilartotheirproductivityrelativetotheU.S.63ProductivityandWagesSource:InternationalMonetaryFund,BureauofLaborStatistics,andTheConferenceBoard64DoWagesReflectProductivity?(cont.)Otherevidenceshowsthatwagesriseasproductivityrises.Asrecentlyas1975,wagesinSouthKoreawereonly5%ofthoseoftheUnitedStates.AsSouthKorea’slaborproductivityrose(toabouthalfoftheU.S.levelby2007),sodiditswages(whichweremorethanhalfofU.S.levelsby2007).

65MisconceptionsAboutComparativeAdvantageFreetradeisbeneficialonlyifacountryismoreproductivethanforeigncountries.Butevenanunproductivecountrybenefitsfromfreetradebyavoidingthehighcostsforgoodsthatitwouldotherwisehavetoproducedomestically.Highcostsderivefrominefficientuseofresources.Thebenefitsoffreetradedonotdependonabsoluteadvantage,rathertheydependoncomparativeadvantage:specializinginindustriesthatuseresourcesmostefficiently.66MisconceptionsAboutComparativeAdvantage(cont.)Freetradewithcountriesthatpaylowwageshurtshighwagecountries.Whiletrademayreducewagesforsomeworkers,therebyaffectingthedistributionofincomewithinacountry,tradebenefitsconsumersandotherworkers.Consumersbenefitbecausetheycanpurchasegoodsmorecheaply.Producers/workersbenefitbyearningahigherincomeintheindustriesthatuseresourcesmoreefficiently,allowingthemtoearnhigherpricesandwages.67MisconceptionsAboutComparativeAdvantage(cont.)Freetradeexploitslessproductivecountries.WhilelaborstandardsinsomecountriesarelessthanexemplarycomparedtoWesternstandards,theyaresowithorwithouttrade.Arehighwagesandsafelaborpracticesalternativestotrade?Deeperpovertyandexploitation(ex.,involuntaryprostitution)mayresultwithoutexportproduction.Consumersbenefitfromfreetradebyhavingaccesstocheaply(efficiently)producedgoods.Producers/workersbenefitfromhavinghigherprofits/wages—highercomparedtothealternative.68ComparativeAdvantageWithManyGoodsSupposenowthereareNgoodsproduced,indexedbyi=1,2,…N.Thehomecountry’sunitlaborrequirementforgoodiisaLi,andthatoftheforeigncountryisa*Li.Goodswillbeproducedwherevercheapesttoproducethem.69ComparativeAdvantageWithManyGoods(cont.)Letwrepresentthewagerateinthehomecountryandw*representthewagerateintheforeigncountry.IfwaL1<w*a*L1

thenonlythehomecountrywillproducegood1,sincetotalwagepaymentsarelessthere.Orequivalently,ifa*L1/aL1>w/w*,

iftherelativeproductivityofacountryinproducingagoodishigherthantherelativewage,thenthegoodwillbeproducedinthatcountry.70Table3-2:HomeandForeignUnitLaborRequirements71ComparativeAdvantagewithManyGoods(cont.)Supposethereare5goodsproducedintheworld:apples,bananas,caviar,dates,andenchiladas.Ifw/w*=3,thehomecountrywillproduceapples,bananas,andcaviar,whiletheforeigncountrywillproducedatesandenchiladas.Therelativeproductivitiesofthehomecountryinproducingapples,bananas,andcaviararehigherthantherelativewage.72ComparativeAdvantageWithManyGoods(cont.)Ifeachcountryspecializesingoodsthatuseresourcesproductivelyandtradestheproductsforthosethatitwantstoconsume,theneachbenefits.Ifacountrytriestoproduceallgoodsforitself,resources

are“wasted”.Thehomecountryhashighproductivityinapples,bananas,andcaviarthatgiveitacostadvantage,despiteitshighwage.Theforeigncountryhaslowwagesthatgiveitacostadvantage,despiteitslowproductivityindateproduction.73ComparativeAdvantageWithManyGoods(cont.)Howistherelativewagedetermined?Bytherelativesupplyofandrelative(derived)demand

forlaborservices.Therelative(derived)demand

forhomelaborservicesfallswhenw/w*rises.Asdomesticlaborservicesbecomemoreexpensiverelativetoforeignlaborservices,goodsproducedinthehomecountrybecomemoreexpensive,anddemand

forthesegoodsandthelaborservicestoproducethemfalls.fewergoodswillbeproducedinthehomecountry,furtherreducingthedemandfordomesticlaborservices.74ComparativeAdvantageWithManyGoods(cont.)Supposew/w*increasesfrom3to3.99:Thehomecountrywouldproduceapples,bananas,andcaviar,butthedemand

forthesegoodsandthelabortoproducethemwouldfallastherelativewagerises.Supposew/w*increasesfrom3.99to4.01:Caviarisnowtooexpensivetoproduceinthehomecountry,sothecaviarindustrymovestotheforeigncountry,causingadiscrete(abrupt)dropinthedemandfordomesticlaborservices.Considersimilareffectsasw/w*risesfrom0.75

to10.75Fig.3-5:DeterminationofRelativeWages76ComparativeAdvantageWithManyGoods(cont.)Finally,suppose