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at each given relative price divided by the total quantity of wine supplied, (QC + Q*C )/(QW + Q*W). ? The relative demand of cheese in the world is a similar concept. Trade in a OneFactor World 26 2 RD39。 RD 1 Q39。 aLC/aLW a*LC/a*LW RS Figure 33: World Relative Supply and Demand Trade in a OneFactor World Relative price of cheese, PC/PW Relative quantity of cheese, QC + Q*C QW + Q*W L/aLC L*/a*LW 27 Trade in a OneFactor World ? First,the RS curve shows that there is no supply of cheese if the world price drops below aLC/aLW. Assume aLC/aLWa*LC/a*LW, Home will specialize in the production of cheese. Home will specialize in the production of wine whenever PC/PWaLC/aLW , or PC/aLCPW/aLW. Similarly,Foreign will specialize in wine production whenever PC/PWa*LC/a*LW. ? Second,when the relative price of cheese, PC/PW=aLC/aLW, Home workers are indifferent between producing cheese and wine. We have a flat section of the supply curve. 28 Trade in a OneFactor World ? Third, for PC/PWa*LC/a*LW, both Home and Foreign will specialize in cheese production. There will be no wine production, so that the relative supply of cheese will bee infinite. ? Fourth, At PC/PW=a*LC/a*LW, Foreign workers are indifferent between producing cheese and wine. We again have a flat section of the supply curve. ? Fifth, aLC/aLW PC/PW a*LC/a*LW, the relative supply of cheese is (L/aLC)/(L*/a*LW). 29 ? The Gains from Trade ? If countries specialize according to their parative advantage, they all gain from this specialization and trade. ? We will demonstrate these gains from trade in two ways. ? First, we can think of trade as a new way of producing goods and services (that is, a new technology). Trade in a OneFactor World 30 ? Another way to see the gains from trade is to consider how trade affects the consumption in each of the two countries. ? The consumption possibility frontier states the maximum amount of consumption of a goods a country can obtain for any given amount of the other modity. ? In the absence of trade, the consumption possibility curve is the same as the production possibility curve. ? Trade enlarges the consumption possibility for each of the two countries. Trade in a OneFactor World 31 Trade in a OneFactor World Figure 34: Trade Expands Consumption Possibilities T F P T * P * F * (a) Home (b) Foreign Quantity of wine, QW Quantity of cheese, QC Quantity of wine, Q*W Quantity of cheese, Q*C 32 A Numerical Example ? We must understand two crucial points: When two countries specialize in producing the goods in which they have a parative advantage, both countries gain from trade. Comparative advantage must not be confused with absolute advantage。 it is parative, not absolute, advantage that determines who will and should produce a good. 33 A Numerical Example ? aLC /aLW = 1/2 a*LC /a*LW = 2 Unit labor requirements for domestic and foreign countries Cheese Wine Domestic aLC = 1 hour/kg aLW = 2 hours/L Foreign a*LC = 6 hours/kg a*LC = 3 hours/L 34 A Numerical Example ? The domestic country is more efficient in both industries, but it has a parative advantage only in cheese production. ? The foreign country is less efficient in both industries, but it has a parative advantage in wine production. 35 A Numerical Example ? With trade, the equilibrium relative price of cheese must be between aLC /aLW = 1/2 and a*LC /a*LW = 2 ? Suppose that PC /PW = 1 in equilibrium. ? In words, one kg of cheese trades for one liter of wine. 36 A Numerical Example ? If the domestic country does not trade, it can use one hour of labor to produce 1/aLW = 1/2 liter of wine. ? If the domestic country does trade, it can use one hour of labor to produce 1/aLC = 1 kg of cheese, sell this amount to the foreign country at current prices to obtain 1 liter of wine. ? If the foreign country does not trade, it can use one hour of labor to produce 1/a*LC = 1/6 kg of cheese. ? If the foreign country does trade, it can use one hour of labor to produce 1/a*LW = 1/3 liter of wine, sell this amount to the domestic country at current prices to obtain 1/3 kg of cheese. 37 Relative Wages(相對工資) ? The relative wage of a country’s workers is the amount they are paid per hour,