recap of last class:

US data show that imports and jobs move the same directions rather opposite directions, which is not consistent with the claim that imports result in "systemic job loss"
   
    Note 1: Trade changes our types of jobs, not our total number of jobs
        Some industries contract with imports and other industries expand with exports

    ? What do we typically hear about as the advantage to more trade, increased opportunities to import or to export?
    Note 2: We typically hear about how freer trade raises our export opportunities, but it's our imports that allow us to consume more and raise our standard of living = our consumption benefits from trade
    exports are how we pay for imports => exports = the cost of our imports

A. David Ricardo's trade according to comparative advantage

    Consider my neighbor: both she and husband work full-time
    She does both inside and outside work at home.
    She works pretty long and is always behind
    He says she should do both since she is so much better than he is at both of them.
    If they stay married, which task should he do, the inside work or the outside work?
    Depends on which of the two he is less bad at compared to her.

    The basic notion of comparative advantage is that all of us are better off if each of us specializes in what we do comparatively well.
    The surprise is that being better or worse is really irrelevant, gains exist anyway.
    True for households
    True for businesses: the lawyers who type faster than their secretaries
    True for countries

    Challenging topic: Economist Paul Samuelson once asked to name an economic theory that was:
    1. important
    2. universally accepted by economists
    3. widely misunderstood by everyone else
    His choice: the theory of comparative advantage

    Been around a long time -- since 1817
    1st laid out by David Ricardo, a London businessman

    1789-1815: Napoleanic wars: French blockade of UK; high price of food.
    After war, Corn Laws passed to keep up the price of food
    Corn Laws placed a tariff on grain imports
    Ricardo a London businessman, constructed his trade model to argue for the repeal of the Corn Laws

    Adam Smith: pointed out that trade is mutually beneficial if you are more efficient in one product and your trading partner is more efficient in another
    Ricardo proved that trade can be mutually beneficial even if you are more efficient in both or less effiicient in both.
    the Ricardian trade model of comparative advantage

    What does the Ricardian model accomplish?
    1. Highlights the role of comparative advantage in trade
    2. Illustrates the relationship between productivity and competitiveness

1. Theory

    --Output is produced by homogeneous labor
    All workers are the same in a given country
    Based on labor theory of value, later used by Karl Marx: products have inherent values equal to the amount of direct and indirect labor time necessary to produce them.

    --Markets are competitive

(1) Absolute advantage (AA)

    Ex: handout - case 1

    Higher productivity --> absolute advantage
    A nation has an absolute advantage compared to its trading partner(s) when it can produce more output with an equal amount of inputs (or the same amount of output with a smaller amount of inputs).

    Who has the absolute advantage in PCs? In Garments?

    Absolute advantage is important
    Who will have the higher wage?
    A/A --> wage differences
    competitive markets =>
    productivity determines wages
    US wages will be higher (20 times higher)

    Given the information here, can the US and Malawi benefit from trading with each other? No
    <-- they have the same trade-off between products
    <-- the US has the same productivity margin in both products

(2) comparative advantage (CA)

    Ex: handout - case 2

    (2.1) Compare productivity margins

    A country should export what it does most best or least worst and import what it does least best or most worst.
    US: PCs; Malawi: garments

    (2.2) Compare opportunity costs (OCs)

    Recall: opportunity cost: sacrifice you make to get something you want.
    Ex: to get more PCs, you must switch labor (L) from garments to PCs.

	units lost in contracting industry		units lost per unit gained
OC of extra output =	------------------------------------------	=
	units gained in expanding industry

    Ex: 1 L-year --> 120 PCs or 600 garments

        ? O/C of 1PC in the US? 
    600 garments lost / 120 PCs gained = 5 garments per PC

    Comparative advantage (C/A): A nation has a comparative advantage when it can produce an item for a lower opportunity cost than its trading partner(s).

   Trade according to comparative advantage: Export your low opportunity cost products and import your high opportunity cost products
    US exports PCs and imports garments
    Malawi exports garments and imports PCs
    Mutually beneficial trade exists even though the US is more efficient in both products and Malawi is less efficient in both.