Question

According to the Ricardian model, the reason for lower priced services in the LDC's is:

Labor-productivity in commodities is lower in poor countries. Discuss

Answer 1

[AI-generated answer — Bot GPT 3.5]

According to the Ricardian model, the reason for lower priced services in the less developed countries (LDCs) is primarily due to lower labor productivity in commodities in these countries. The model is based on the theory of comparative advantage, which states that countries should specialize in producing goods or services in which they have a comparative advantage or lower opportunity cost.

In the Ricardian model, it is assumed that there are differences in labor productivity across countries, particularly in the production of goods and services. Labor productivity refers to the amount of output that can be produced by a worker in a given time period. Therefore, if a country has lower labor productivity in the production of commodities but higher productivity in services, it will have a comparative advantage in the provision of services.

The lower labor productivity in commodities in LDCs can be attributed to various factors. These factors may include limited access to modern technology, lack of infrastructure, inadequate education and training, and lower capital investment. As a result, LDCs may struggle to compete with developed countries in the production of commodities.

On the other hand, services often require less physical capital and can be more labor-intensive. Therefore, despite the lower labor productivity in commodities, LDCs may have a comparative advantage in providing services. They can leverage their abundant labor force by allocating it to the service sector, where their relative productivity may be higher compared to commodities.

Due to their lower labor productivity in commodities and higher productivity in services, LDCs can offer services at lower prices compared to developed countries. This creates opportunities for international trade and specialization, as developed countries may find it more cost-effective to outsource certain services to LDCs.

However, it is essential to note that the Ricardian model oversimplifies the real-world dynamics of international trade. It assumes constant labor productivity and neglects other factors such as technological advancements, transportation costs, and trade barriers. Nevertheless, the lower labor productivity in commodities is one of the key reasons for lower priced services in LDCs, as predicted by the Ricardian model.