International Trade - Theory and Policy, 2010a

In this way, we might raise the well-being of all individuals despite differences in relative productivities.
In this description, we do not predict that a result will carry over to the complex real world. Instead, we
carry the logic of comparative advantage to the real world and ask how things would have to look to
achieve a certain result (maximum output and benefits). In the end, we should not say that the model of
comparative advantage tells us anything about what will happen when two countries begin to trade;
instead, we should say that the theory tells us some things that canhappen.
KEY TAKEAWAYS
Trade based on comparative advantage can make everyone in both countries better off after trade.
Superior technology in developed countries need not imply that industries in less-developed countries
cannot compete in international markets.
Firms in developed countries can sometimes compete in international markets even when foreign firms
pay their workers much lower wages.
EXERCISES
1. Jeopardy Questions. As in the popular television game show, you are given an answer to a
question and you must respond with the question. For example, if the answer is “a tax on
imports,” then the correct question is “What is a tariff?”
1. The term used to describe workers who have the same productivity in multiple
industries.
2. The term used to describe a product when it is identical across multiple firms.
3. The term used to describe a product, like wine, that is produced by different firms,
each with slightly different characteristics.
4. The assumption made about labor employment in the Ricardian model.
5. The term used to describe the amount of goods that can be produced using all the
available world resources.
2. What three things must be achieved to maximize world output?
3. In the gardening story, if the son can do the rototilling in four hours, the raking in two hours, and the
planting in three hours, which activity is the son ìleast worseî in producing compared with his father?
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