Appendix 3.1
Suppose:
- there are 5 goods
- all other classical assumptions hold especially fixed labor/output ratios
In Table 3.1 are the labor/output ratios.
Country A's comparative advantage is in good Y.
We guess that B will export T and A will export Y, but what about the other 3 goods?
We know that goods T and Y determine the range for relative wages.
1/3 < Wa/(E.Wb) < 1
Table 3.2 ranks the value of (labor hours per unit B produced/labor hours per unit A produced) for each good.
B's greatest comparative advantage good (its most competitive export) is on the left. To produce one unit of T, country B only requires one-third as much labor as country A does.
This ordering is called 'the chain of comparative advantage'.
Suppose the relative wage rate was 2/3. Then B would produce all the goods except Y.
Where do the wages rates actually get detemined? In theory the wage rates in each country should adjust so that trade is balanced. If the wage rate in one country is 'too high' then the price of its least competitive export will be too high to compete in the market. So the country will tend to do some combination of lowering the wage rate and cutting back production of its least advantageous good until trade is balanced.
