Work coefficient

The working coefficient indicates how much amount used (input) on work performance is needed to produce a unit of goods. This work coefficient plays an important role in the basic idea of comparative advantage , which David Ricardo ( Ricardo model ) established in 1817 in his work "The Principles of Political Economy and Taxation".

Importance of the work coefficient

The work coefficient is therefore used in the broadest sense to identify those goods for an economy in which it has a comparative advantage over other economies. Comparative advantages (comparative advantages) provide the answer to which economy should specialize in which goods production and thus arise, quite simply, through a low use of the production factor labor in goods production.

The basis for this decision are the so-called opportunity costs , which represent the waiver or the lost income that would have resulted from better use of the resources. The opportunity or alternative costs result from the ratio (quotient) of the labor coefficients of various goods in an economy. The country with the lowest opportunity cost has the comparative advantage with regard to this one good and should specialize in its production.

The question arises why Ricardo chose the production factor labor (not land or capital) as the key production factor in order to describe his simple explanatory model by means of a suitable coefficient. An answer to this could be explained by a quotation from his book “The Principles of Political Economy and Taxation”, in which the importance of the labor factor is presented. This quote: “Labor, it must be remembered, is the ultimate price which is paid for everything; (…). ”Suggests that Ricardo ultimately sees work as the price at which everything is paid for.

The labor coefficient (input to output) is the reciprocal value (the reciprocal) of labor productivity (output to input) and thus, in a general sense, reflects the technological level of an economy. The lower the labor coefficient, the higher the labor productivity, which indicates efficient production.

In summary, it can be said that the work coefficient shows the hours of work that are needed to produce a good. This enables different goods and different economies to be compared in terms of their efficient production. However, when considering the above, it should not be forgotten that the mere inclusion of the production factor labor is in reality not sufficient to determine the comparative advantage of an economy. Thus, the labor coefficient is only a very small tool in determining the most beneficial production that ultimately leads to successful foreign trade and related welfare gains.

Examples

In the following, the concept of the work coefficient will be classified using two important examples.

example 1

First, two working coefficients (a) are derived, which should help to understand the facts later.

a) For one unit (e.g. 1 liter) of milk, 2 working hours are required in Germany :

{\ displaystyle a_ {m} = {\ frac {2h / unit} {1unit}} = 2h}

(The labor coefficient for milk in Germany is 2)

b) One working hour is required in Germany for one unit of steel :

{\ displaystyle a_ {s} = {\ frac {1h / unit} {1unit}} = 1h}

(The domestic work coefficient for steel is 1)

With the help of these work coefficients, the opportunity costs (O) can now be determined.

The opportunity costs of milk production result as follows:

{\ displaystyle O_ {m} = {\ frac {a_ {m}} {a_ {s}}} = {\ frac {2} {1}} = 2}

These opportunity costs can be interpreted as follows: 2 units of steel must be dispensed with in order to produce one more unit of milk. In other words, this means that one unit of milk costs 2 units of steel.

Example 2

This example shows how, with the help of the labor coefficients, one can easily compare oneself with other countries regarding the production of a good.

The working coefficients of the product milk are given for:

Domestic: a_m = 6

Abroad: a_m * = 12

These values can be interpreted in such a way that Germany has a production lead compared to abroad. In other words, the home country is twice as productive ( = 2) in the production of milk and thus has a relative productivity advantage of 2. ${\ displaystyle {\ frac {12} {6}}}$ ${\ displaystyle {\ frac {12} {6}}}$

However, it cannot be said without further ado that the domestic market should specialize in the production of milk, since in this example there is no information about the opportunity costs.

literature

Dieckheuer, Gustav (2001), International Economic Relations , 5th Edition, Munich, Vienna, Oldenbourg: R. Oldenbourg
Gabler Verlag (1993), Gabler Wirtschaftslexikon (AE) , 13th edition, Wiesbaden: Gabler
Krugman, Paul R .; Obstfeld, Maurice (2006), International Economy , 7th edition, Munich: Pearson Studium
Krugman, Paul R .; Obstfeld, Maurice (2003), International Economics , 6th Edition, Boston: Pearson Education
Kurz, Heinz D. (1994), On the principles of political economy and taxation , Marburg: Metropolis
Ricardo, David (1973), The Principles of Political Economy and Taxation , London: Everyman's Library
Sell, Axel (2003), Introduction to International Economic Relations , 2nd edition, Munich: R. Oldenbourg
Siebert, Horst (1994), foreign trade , 6th edition, Stuttgart: Gustav Fischer
Woll, Artur (2000), Wirtschaftslexikon , 9th edition, Munich, Vienna, Oldenbourg: R. Oldenbourg

Individual evidence

↑ Gabler Verlag (1993), Gabler Wirtschaftslexikon (AE) p. 182
↑ Woll, Artur (2000), Wirtschaftslexikon p. 37
↑ Dieckheuer, Gustav (2001), International Economic Relations , p. 31ff
↑ Ricardo, David (1973), The Principles of Political Economy and Taxation , p. 253
^ Krugman, Paul R .; Obstfeld, Maurice (2006), Internationale Wirtschaft , pp. 54–80.

[1] Gabler Verlag (1993), Gabler Wirtschaftslexikon (AE) p. 182

[2] Woll, Artur (2000), Wirtschaftslexikon p. 37

[3] Dieckheuer, Gustav (2001), International Economic Relations , p. 31ff

[4] Ricardo, David (1973), The Principles of Political Economy and Taxation , p. 253

[5] Krugman, Paul R .; Obstfeld, Maurice (2006), Internationale Wirtschaft , pp. 54–80.