Empirical Tests of the Ricardian Model of Trade 2. Consider the following data.
ID: 1137040 • Letter: E
Question
Empirical Tests of the Ricardian Model of Trade 2. Consider the following data. Explain whether or not the table supports or does not support the Ricardian model and why. Table 7.1 Intemational Comparisons of Productivity and Wages in Manufa ctu ring, 2004 Market Exchange Rates Earnings per hour PPP Exchange Rates Earnings per hour Average Average Earnings C oun US Sweden Netherands 4.85 22.66 $41,238.26 42.20 22.32 $40,613.83 Japan A ustralia UK France Canada Span Rep. of Korea 16.40 $ Mexico Costa Rica S Philippines 3.78 $ 0.48 S 1,097.95 $ 15.81 $1.99 4,588.86 Egyp India VA per hour Earnings VA per hour $47.47 $16.15 S34,263.84 $47.47 16.15 S34,263.84 $46.10 S17.16 S33,459.65 $38.36 14.28 S27,847.19 $38.94 $14.37 $32,506.47 $31.46 11.61 S26,263.97 S 36.94 $16.78 $33,247.49 40.10 18.22 $36,090.21 $34.89 $19.22 $ 40,972.09 $ 32.34 17.81 $37,978.26 $34.60 20.37 S38,985.14 33.62 19.79 $37,870.91 $33.38 $15.37 S30,281.5536.05 16.59 S32,702.79 $30.34$14.91 $27,750.56 35.86 17.62 S 32,800.87 9.39 $23,145.03 23.92 13.70 S 33,773.86 2.50 S 5.811.97 3.58 S 8,827.07 8.76 $ 8.57 $ 1.77 4,102.92 12.40 $ 1.75 4.325.54 17.49 $ $3.39 $0.47 S 1,374.00 10.68 $ 0.64 $0.19 S 458.55 318 1.48 0.95 4,321.29 2,292.76 Sources: calculated by the authors from Intemational Labor Organization, Laborsta Database; World Bank, World Development Indicators; International Monetary Fund, International Financial Statistics; and figures at www NationMaster.com. Notes 1) VA-Value-added and is a measure of labor productivity 2) Foreign currencies can be converted to U.S. dollars using the market exchange rate or by using PPP (Purchasing Power Parity) exchange rates designed to correct for lower price levels typically found in developing countries. For completeness, the table above presents data using both methods to convert foreign variables measured in foreign currencies into U.S. dollar values.Explanation / Answer
Solution:The table given in the question supports Ricardian model.
The cutting edge rendition of the Ricardian Model accept that there are two nations, delivering two merchandise, utilizing one factor of creation, generally work. The model is a general harmony show in which all business sectors (i.e., merchandise and factors) are impeccably aggressive. The merchandise created are thought to be homogeneous crosswise over nations and firms inside an industry. Merchandise can be costlessly dispatched between nations (i.e., there are no transportation costs). Work is homogeneous inside a nation however may have diverse productivities crosswise over nations. This suggests the creation innovation is accepted to contrast crosswise over nations. Work is costlessly portable crosswise over enterprises inside a nation yet is stable crosswise over nations. Full work of work is likewise accepted. Buyers (the workers) are expected to expand utility subject to a wage limitation.
Similarly in the table provided, there is a general equilibrium where market is perfectly competitive. The goods produced are homogenous though productivity differs across countries due to use of available technologies. Similarly in some countries labour is costly while in some it is cheap but productivity of these labour vary greatly between countries. This indicates that production technology with skilled, semiskilled and naïve labourers differs across countries. This all suggests that the table supports the Ricardian model.
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