World Production Possibility Frontier

  1. The Ricardian World (AD 1 - 1945): Emergence of the Middle Class and Specialization in Western Europe
Transportation cost

The Ricardian model describes the world economy from the first century AD until the end of WWII, which was based on specialization.

Alexander (Bronze age, BC 330)

Pre-Industrial Revolution (iron age)

55 BC: Caesar invaded Britain with two legions

122 AD: Hadrian's four legions invaded Britain)

476 - 221 BC (Warring States period, China: Qin conquered 7 states, unifying China)

Specialization was facilitated by the declining transportation costs at the beginning of the Roman Empire. (e.g., via Appia, 312 BC)

Greek world (323 - 146 BC)

Alexander's medallion

Alexander the Great unwittingly created a large empire with a common language and expanded trade in the Mediterranean world. The Silkroad was opened by the beginning of the first century BC .

Persepolis was the capital of the Achaemenid Emire (550-330 BC). ©

(In 331 BC, 120,000 talents of gold and silver were taken from the treasury of Persepolis. Total loot from Susa, Babylon, Persepolis and Ecbatana exceeded 200,000 talents of silver, which were used to mint Greek drachmas. 1 talent of gold = about $1 million today. 1 talent of silver = about $10,000 - 18,000. 200,000 talents of silver = about $2 billion today. This was the source of economic growth of the Greek world. Alexander had looted 3000 talents of gold from Darius' throne tent.

Susa: 50k talents, Persepolis: 120k talents, Ecbatana: 26k.

Alexander also curbed pirates in the Mediterranean. Alexander and a Pirate (St. Augustine)

 Western Europe

Julius Caesar began his conquest of Gaul in 59 BC . Six million people lived in Gaul at the time. After six years of campaign, about one million had been killed (1,192,000, Pliny the Elder), and Caesar brought one million Gallic (French) slaves to Rome when he left Gallia in 50 BC. (Rome's population was already about 1 million, 1/3 of which were slaves). A best guess/estimate of Roman Italy's population in the first century was about 1 million. (Comparable population centers in the first century AD were Alexandria, Jerusalem, Chang An) Most of these slaves were sold to aristocrats to farm the land, effectively driving the Roman farmers out of agriculture.

Rich aristocrats served as the role model for the emerging middle class. Pratically all land in Italy (south of Florence) was owned by 30 patrician families who used the slave labor.

Emergence of the middle class . Free men were not able to compete with slaves in farming (they worked in farms, mines and mills), and were forced to engage in trade and other businesses, thus forming the emerging middle class in the first century AD. Their system demonstrated that hard work and shrewd business can produce wealth and the rich can acquire social status. Smart slaves were often able to buy freedom with the money they earned in business.

After the collapse of the Roman Empire, traveling once again became hazardous for several centuries. Even after the First Crusade in 1099, many pilgrims were sluaghtered by the bandits. Knights Templar (created in 1119) stationed at Al Aqsa Mosque (the location of Solomon's Temple) in Jerusalem began to recruit knights to ensure the safety of pilgrims. (Knights Hospitaller created in 1023 provided care for pilgrims in Jerusalem, also became a military order, and later moved its HQ to Rhodes.)

The middle class began to take jobs in other occupations, thereby producing a variety of goods and trading with others. (shopowners, taverns, and worked in construction, trading, transportation sectors.) The number or variety of goods increased. Roman citizens mostly consumed porridge before. Meat was rarely consumed unless one was desperate. Now they began to consume a variety of new foods, fruits and grains from other regions (grains from Egypt), and other luxuries (glass from Syria and oysters from England). (Trade increases varieties of goods. About 200,000 Roman citizens were recipients of the free grain dole.)

Emergence of the middle class ⇒ trade volume increased.

How rich was Caesar? His will stated every Roman citizen will receive 75 Attic drachma. One drachma = daily wage = almost a denarius (1 denarius = 1.13 drachma). 75 drachma (300 seterces) = $7500.

Roman Empire was a free trade area.


Decline of Trade Costs

(i) common language: Greek

Because of huge price differences between regions, international trade has enabled traders to accumulate wealth. The Romans conquered the Mediterranean world and built the roads, connecting all the nations they controlled, and unwittingly ensured the safety of travelers and merchants.[This means a decline in travel risk and transportation costs, the most significant trade barrier in the ancient world.] They accumulated wealth through trade and the Roman soldiers were well paid for their service. Free bread was distributed to spectators at gladiator games.

Trade contributed to slavery and income inequality, especially in the early stages of world civilization. (Medical doctors and learned Greek teachers were mostly slaves.) However, the conquered nations also benefitted from it. (income inequality also stimulates profit motives and economic growth.) For instance, before Roman occupation, Britain was occupied by various Celtic tribes. The invasion raised the racial consciouness of the Celtic tribes, who began to compete with the conquerers. Without the Roman invasion, the Celts would have been dormant for a few more centuries.

(ii) Infrastructure investment ( via Appia , via Egnatia, via Latina, etc. ⇒ Julius Caesar founded the city of Londinium in AD 43. Road construction of 53,000 miles throughout the Empire reduced crimes, thereby lowering transportation costs. (Compare this to 46,000 miles of US highways built during the Eisenhower administration.)

mile = from mille (thousand) = 1000 double paces (one step each foot.)

During the time of Augustus, for the first time it was relatively safe for people to travel. People enjoyed traveling, much as Americans began to enjoy traveling after the middle class were able to acquire auomobiles. As a result, trade expanded throughout the Mediterranean world. The missionary journeys of Apostle Paul, a tentmaker, are a good testimony demonstrating that the middle class traveled widely throughout the Roman Empire. There were many bandits and pirates in the Mediterranean, but it was much safer than before. Without safe transportation it was difficult for countries to ship goods to other parts of the Empire.

Octavian received the title of Augustus in 27 BC and became the first Emperor. He and Livia did not have their own children. Livia's son from her previous marriage, Tiberius, became the next emperor, but Augustus and Tiberius were joint rulers for 2 years (AD 12 - 14). Tiberius became the emperor on August 19, 14 AD when Augustus died.

(iii) Pompey eliminated the pirates in the Mediterranean Sea.

Development of conquered regions . (ii) + (iii): transportation costs gradually declined. As a result, merchants prospered. Rome used taxes to build roads. For example, Julius Caesar founded the city of Londinium, but this initial settlement gradually turned into a trade center by 50 AD. Romans also built the road to Lutetia (Paris).

It goes without saying that people of the conquered regions suffered untold hardship and misery. Emotional suffering associated with slavery and subjugation aside, economically, it would be a cold comfort to recognize that the rank and file (common people) received some benefits from the conquered nations, because even the slaves could buy freedom, and Romans reinvested and built infrastructure in these provinces. Jewish revolt resulted in the destruction of the Temple in Jerusalem in AD 68. Unconquered regions (e.g., Russia, Ukraine, Arabia) remained barbaric for many centuries. (British Isles were occupied by Britons and Scots (Celts).

Western Europe European economies was based on specialization. Each family chose an occupation and specialized in those occupations. Many last names such as Smith, Schumacher, Miller, etc. are remnants of such traditions.
Rome's trade deficit

Ricardo's model is relevant to such economies. Rome exported blue glass produced in Syria to China, and imported silk, pottery, and tea from China, but Rome did not export much to pay for imports. Accordingly, Rome had a huge trade deficit , which was paid by gold and silver. Silver coins after Tiberius have been found in China, Vietnam, and Japan. In his Natural History (77-79 AD), Pliny the Elder observed:

...we have come now to see... journeys made to Seres [China] to obtain cloth, the abysses of the Red Sea explored for pearls, and the depths of the earth scoured for emeralds... at the lowest computation, India and Seres and the [Arabian] Peninsula together drain our empire of one hundred million sesterces every year. That is the price that our luxuries and our womankind cost us.

one denarius = 4 sestertii/sesterces ($50 -100 today)
100 million sestertii = roughly, $5 - 10 billion.

A Roman soldiers' salary was 225 denarii (roughly $12,000) per year in the first century AD. The average annual income per person was about $570. Because of the huge trade deficit of the Empire, Rome gradually cut military expense, which was partly responsible for the collapse of the Empire.

Septimus Severus (193-211 AD), the fineness was around 50%.

Roman transportation

via Sacra in Roman Forum (plaza). Via Appia begins here and ends at Brindisi (350 miles), built in 312 BC.

Via Ostiense, Ostia Antica (near Rome)

Ruins of Roman road in Sardinia

A glass pane in a house in Pompei, destroyed by the eruption of Mount Vesuvius in AD 79.


  2. Production Possibility Frontier

A country's production possibilities are the area on or below the production possibility frontier (PPF). How do we add the production possibilities of two countries with different possibilities?

In the two-good world, a country's production possibilities are the triangular area in Figure 14. We are mostly concerned with the outermost possibilities or the PPF. It consists of two endpoints and all the points in between.Two endpoints indicate the absence of one good (meaning one good is not being produced) and the country specializes in one good.


or specialization


Diversification vs Specialization

Diversification: A country produces all goods.

Specialization: A country produces only a few goods.

Figure 14. Specialization versus Diversification

Comparative Advantage

Assume: The US has a comparative advantage in commodity 1, i.e.,

the PPF of UK is steeper than that of the US.

Figure 15. Production possibility curves of the two countries


  3. World Production Possibility Frontier
 Wrong specialization  
Wrong specialization is inefficient  There are two line segments that are noteworthy in the above diagram.

(1) On the blue segment, US diversifies, and UK specializes in y1.

(2) On the green segment, US specializes in y2, and UK diversifies. (undesirable possibilities)

World PPF Correct specialization results in the WPPF. 
  (3) On the segment AR, US diversifies, and UK specializes in y2.

(4) On the segment RB, US specializes in y1, and UK produces both goods. At point R (Ricardo point), each country specializes in the good in which it has a comparative advantage.

  4. The Ricardo Theorem
 Ricardo Theorem  If
  1. aL1/aL2 < a*L1/a*L2 (HC has a CA in commodity 1),
  2. aL1/aL2 < p*1/p*2 < a*L1/a*L2

    (The relative price of 1 lies between those in autarky in the two countries)

then the Ricardo Point (where each country specializes in the commodity in which it has a comparative advantage) maximizes NDP, NDP* and NWP.

Significance of The Ricardo Theorem (1) Each country should export the product for which it has a comparative advantage, provided that trade is balanced. Such a pattern of trade not only maximizes a country's national income, but also forces the country to export them in order to maximize consumer welfare. ⇒ A country with a large trade surplus may export a product for which it has a comparative disadvantage.

(2) Ricardo Theorem holds even when a country has absolute advantages over another in all industries.

A fragment of mosaic in Sepphoris/Zippori, Israel.

Trade requires safe navigation of merchant ships. For the first time in history, Ptolemy, one of the four generals of Alexander the Great, built in Alexandria a lighthouse, which was one of the Seven Wonders of ancient times. (Trade promotes new innovations.) The existence of lighthouses also is evidence of substantial gains from trade.




Istmos Canal


diolkos, Corinth (about 4 miles), Shutterstock

Istmos Canal (1886) in Corinth. Emperor Nero initiated a project to build a canal in Corinth, connecting the Adriatic Sea on the left and the Aegian Sea on the right, but was not able to complete it. The Adriatic Sea around the Peloponnesian Peninsula was so trecherous that sailors often unloaded their cargoes and moved the ships via inland route to Corinth, and set sail again from there to reach other ports sin the Aegean Sea.

Etruscans were the ancestors of Romans who settled in northern Italy.
Etruscan Art

Roman plumbing

Cretans in the Knossos Palace invented the plumbing system, carrying the sewage away from the palace. The Romans copied this technique from the Cretans, and began to use indoor plumbing extensively. Indoor plumbing was not adopted in America until the 19th century. Western countries also borrowed the Roman system of government.