Ricardian

Question 1

How are countries different in Ricardian?

Answer 1

Different labour productivity

Question 2

What is the opportunity cost of good A in terms of good B?

Answer 2

The number of units of good B that have to be given up to produce an additional unit of Good A.

Question 3

A country has a comparative advantage in good A if…

Answer 3

It has a LOWER opportunity cost if good A in terms of good B compared to another country.

Question 4

How can we show that trade based on comparative advantage is beendifical?

Answer 4

Global production rises - can produce more goods with the same resources as each country specialising means these goods are produced more efficiently.

Question 5

Background on David Ricardo and why he came up with the model.

Answer 5

1817
1851 Corn laws - Ricardo wanted to show that tariffs on grain imports into UK were bad
Hence he made uk look, as weak as possible and still showed Trade is beneficial.

Question 6

What determines comparative advantage in Ricardian model?

Answer 6

Different labour productivity across countries

Question 7

Dimensions of Ricardian model

Answer 7

2-2-1

2 countries, 2 goods, 1 FOP = labour

Question 8

Labour mobility assumptions (2)

Answer 8

1. Labour mobile across industries

2. Labour immobile across countries

Question 9

Assumption about market structures

Answer 9

Perfect competition since Ricardian is a neoclassical model

Question 10

Unit labour requirement shows…

Answer 10

How many units of labour are needed to produce 1 unit f output?

Question 11

What do unit labour requirmenrs imply about return to scale?

Answer 11

CRS - if we want to double output, must double inputs

Question 12

How do unit labour requirements relate to labour productivity?

Answer 12

INVERSE of productivity - lower labour unit requirements = higher productivity

Question 13

PPF shows

Answer 13

The maximum amount f a good that can be produced for any amount f ten other good.

Question 14

PPF equation

Answer 14

aLW Qw + aLC Qc = L

Question 15

Slope of PPF equals

Answer 15

Opportunity cost of cloth in terms of wine

= aLC / aLW

Question 16

Optimum production depends on (2)….

Answer 16

1. PPF - what an economy is able to produce

2. Relative prices

Question 17

Relative price of cloth in terms of wine =

Answer 17

PC/Pw

- the amount of wine that can be exchanged I; the market for one unit of cloth

Question 18

Relationship between wages across industries and why

Answer 18

Ww = Wc = W

Due to labour mobility across industries —> arbitrage

Question 19

What is MC formula?

Answer 19

MC = labour unit requirement x wage

- the wage cost to produce an extra unit of output

Question 20

2 conditions that need to be satisfied under perfect competition for an economy to produce both goods.

Answer 20

1. Pc = aLC x Wc

2. Pw = aLW x Ww

Question 21

Optimality condition in Autarky

Answer 21

Pc/Pw = aLC/aLW

Relative price of cloth = opportunity cost of cloth

Question 22

If PC/PW > aLC/aLW an economy t will…

Answer 22

Produce cloth only

Question 23

If PC/PW < aLC/aLW an economy will…

Answer 23

Produce wine only

Question 24

Define absolute advantage

Answer 24

Absolute adv = an economy has a lower labour unit requirement in that good compared to another country’s labour unit requirement in the same good.
I,e, more efficient at producing that good.

Question 25

Is trade beneficial is one country has an absolute adv in both goodS.

Answer 25

YES - Trade us based on comparative advnateb

Question 26

What do we compare between home and foreign to determine comp adv?

Answer 26

aLC/aLW vs aLC*/aLW*

Question 27

What happens to relaorbr priced after trade?

Answer 27

We have ONE WORLD RELATIVE PRICE in between the 2 pre trade domestic prices. Hence relative priced equalise across countries.

Question 28

What do the shapes of world RD and RS look like?

Answer 28

``` RD = we assume standard downwards sloping demand RS = a step function ```

Question 29

Production is world relative price < both opportunity costs

Answer 29

NO cloth produced - wine only.

Question 30

Production if world relative price = home opp cost, but < foreign opp cost.

Answer 30

Home indifferent between cloth and wine = produce some combo of the two. Foreign still produces wine only.

Question 31

Production if: home opp cost < world relative price < foreign opp cost.

Answer 31

Zone of complete specialisation - Home produces cloth only - Foreign produces wine only Any price between the two lead to same quantity as all resources devoted to one good in each country.

Question 32

Production if: Home opp cost < world relative price = foreign opp

Answer 32

Home specialise in cloth | Foreign indifferent between the 2

Question 33

Production if: home & foreign opp costs < world relative price

Answer 33

Home and foreign produce cloth only - NO WINE.

Question 34

The gains from trade can be either show by (2)....

Answer 34

1. Production side gains | 2. Consumption side gains

Question 35

How do we show production side gains from trade?

Answer 35

No trade: show output esch country can produce of the good it does not have a comp adv in using 1 hr labour. Trade: show how much of comp adv good can be produce using 1 hr labour, then how much of the other good we get through trade. Qc x Pc/Pw = Qw Qw x Pw/Pc = Qc

Question 36

The CPF shows

Answer 36

The maximum amount of a good that can be consumed for a given amou;t of the other good.

Question 37

How do PPF and CPF relate in Autarky?

Answer 37

PPF=CPF - can only consume what u produce in aukarky.

Question 38

In what extreme case is trade NOT beneficial consumption wise?

Answer 38

If a country only wants to consume the good it has a comparative advantage in, trade —> NO expansion of CPF here

Question 39

Do we see wages equalising across countries? Why? Why not?

Answer 39

NO - w and w* NOT EQUAL | due to labour immobility across countries assumption

Question 40

W > W* IF...

Answer 40

If home has an absolute advantage in BOTH goods, it will have a higher wage. (Before & after trade) But if neither country has an absolute adv in BOTH goods, ambiguous.

Question 41

Formula for wages under perfect competition

Answer 41

P = MC MC = aLC x Wc Wc = Pc/aLC or Ww = Pw/aLW since Wc=Ww

Question 42

How does Ricardian response to myth 1 that trade is only beneficial for strong countries?

Answer 42

Trade depends on comparative, not absolute adv. | A country with an absolute disadvantage in both goods can still benefit from trade.

Question 43

How does Ricardian respond to myth 2 the Pauper labour argument?

Answer 43

Wages based on domestic labour productivity. Ricardian does not predict wage equalisation from trade. And only 1 FOP so no income inequality implications. - But Trade enlarges CPF so purchasing power rises.

Question 44

How does Ricardian respond to myth 3 exploitation argument?

Answer 44

trade enlarges CPF and so increases purchasing power. Denying opp to trade —> worse outcomes. The Q is not whether they should be paid more, just whether trade makes them better or worse off.

Question 45

Does the empirical evidence support Ricardian prediction on labour productivity and wages?

Answer 45

YES - cross sectional and Time series evidenc of higher productivity = higher wages.

Question 46

Does empirical evidence support Ricardian that trade is based on differing labour productiviies?

Answer 46

YES - higher US/British productivity —> higher US/British exports

Question 47

How does adding transport costs affect the Ricardian model?

Answer 47

Transport costs —> some goods NONTRADED e.gl services like haircuts.