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ricardian model Flashcards

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1
Q
A
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2
Q

Why do countries trade?

A

Because of differences in technology, resource endowments, offshoring costs, and geographic proximity.

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3
Q

What is the Ricardian model?

A

A model that explains trade patterns based on technological differences across countries.

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4
Q

What is absolute advantage?

A

When a country can produce more of a good than others using the same amount of resources.

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5
Q

Why isn’t absolute advantage sufficient to explain trade?

A

Because it does not consider opportunity cost; comparative advantage is the better predictor.

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6
Q

What is comparative advantage?

A

The ability to produce a good at a lower opportunity cost than another country.

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7
Q

What is opportunity cost?

A

The value of the next best alternative foregone when a choice is made.

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8
Q

How is comparative advantage determined?

A

By comparing opportunity costs across countries for producing goods.

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9
Q

Who introduced the theory of comparative advantage?

A

David Ricardo.

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10
Q

What did Ricardo say about specialization?

A

Even if a country has an absolute advantage in all goods, it benefits by specializing in goods with the lowest opportunity cost.

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11
Q

What is the Production Possibility Frontier (PPF)?

A

A curve showing all efficient combinations of two goods that a country can produce with its resources.

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12
Q

What do points on the PPF mean?

A

They are efficient and attainable.

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13
Q

What do points inside the PPF mean?

A

They are attainable but inefficient.

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14
Q

What do points outside the PPF mean?

A

They are unattainable without trade or technological improvement.

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15
Q

In the Ricardian model, what are the only inputs in production?

A

Labor is the sole input.

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16
Q

What does the marginal product of labor (MPL) represent?

A

The extra output produced by one additional unit of labor.

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17
Q

Is MPL constant in the Ricardian model?

A

Yes, there are no diminishing returns to labor.

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18
Q

How is the slope of the PPF calculated?

A

It equals the opportunity cost of the good on the horizontal axis (−MPLC/MPLW).

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19
Q

What is autarky?

A

A situation where a country does not trade internationally.

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20
Q

How is demand represented in the Ricardian model?

A

By indifference curves, showing combinations of goods yielding equal satisfaction.

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21
Q

What happens at the no-trade equilibrium?

A

The country produces and consumes at a point on its PPF that maximizes utility.

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22
Q

What determines wages in competitive markets?

A

Wages equal the price of the good times the MPL (w = P × MPL).

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23
Q

What must be true for wage equality across industries in a country?

A

PW × MPLW = PC × MPLC

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24
Q

How do relative prices reflect opportunity costs in autarky?

A

The relative price of a good equals its opportunity cost.

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25
What happens when international trade opens?
Countries specialize in producing goods where they have comparative advantage.
26
What is the opportunity cost of wheat in Home if MPLW = 4 and MPLC = 2?
0.5 yards of cloth per bushel of wheat.
27
What is the opportunity cost of cloth in Foreign if both MPLW and MPLC are 1?
1 bushel of wheat per yard of cloth.
28
Who has comparative advantage in wheat?
Home, because its opportunity cost for wheat is lower.
29
Who has comparative advantage in cloth?
Foreign, because its opportunity cost for cloth is lower.
30
How do countries determine which good to export?
They export the good in which they have comparative advantage.
31
What happens to consumption possibilities with trade?
They expand beyond the PPF, allowing for higher utility.
32
What is the world price line?
A new budget constraint showing the consumption possibilities with trade.
33
What is the first lesson of the Ricardian model?
Trade patterns are determined by comparative advantage.
34
What is the second lesson of the Ricardian model?
All countries can gain from trade.
35
What is the real wage in terms of wheat for Home?
4 bushels of wheat (MPLW).
36
What is the real wage in terms of cloth for Home?
(PW/PC) × MPLW = (2/3) × 4 = 8/3 yards of cloth.
37
What is the real wage in Foreign in terms of cloth?
1 yard of cloth (MPLC).
38
What is the real wage in Foreign in terms of wheat?
(PC/PW) × MPLC = (3/2) bushels of wheat.
39
Are workers in both countries better off with trade?
Yes, they can consume more of at least one good.
40
What determines wage levels across countries?
Absolute advantage – productivity of labor.
41
Why do low-productivity countries still export?
Because low wages allow them to offer competitive prices.
42
What is the terms of trade (ToT)?
The price of a country’s exports divided by the price of its imports.
43
What happens if a country's ToT rises?
It becomes better off as it can buy more imports for the same amount of exports.
44
What is the Prebisch-Singer Hypothesis?
Over time, the terms of trade for primary goods decline relative to manufactured goods.
45
Why might demand for primary goods decline?
Engel’s law: as income rises, the share spent on food drops.
46
Why might prices of primary goods fall?
Industrial substitution (e.g., less steel in cars) and stagnant demand.
47
What evidence goes against Prebisch-Singer?
Technological advances in manufacturing and oil price manipulation by OPEC.
48
What are export supply and import demand curves used for?
To find the world price in international trade equilibrium.
49
What is the trade equilibrium condition?
Quantity exported by one country = Quantity imported by the other.
50
What does the intersection of export and import curves show?
The world relative price and traded quantity.
51
What does the slope of the PPF represent again?
Opportunity cost of the good on the horizontal axis.
52
What does a higher indifference curve represent?
A higher level of utility or welfare.
53
Can a country with absolute disadvantage in both goods still trade?
Yes, if it has a comparative advantage in one of the goods.
54
What does an increase in labor supply do to the PPF?
It shifts the PPF outward.
55
What happens if a country’s wheat technology improves?
Its PPF pivots outward, increasing relative supply and lowering price of wheat.
56
What determines a country's export pattern?
Its comparative advantage, reflected in no-trade relative prices.
57
What is a key condition for trade to occur?
Different opportunity costs between countries.
58
What if both countries had the same opportunity costs?
There would be no basis for mutually beneficial trade.
59
What does a flatter world price line mean for Home?
Cloth becomes cheaper in terms of wheat — potential welfare gains.
60
What if the world price is equal to a country’s no-trade price?
The country has no incentive to trade.
61
Why does trade raise utility in both countries?
It allows each country to consume beyond its PPF.
62
What are the gains from trade?
Higher consumption and utility levels due to specialization and exchange.
63
Why might wages be lower in some countries?
Lower productivity (absolute disadvantage) leads to lower equilibrium wages.
64
What allows low-wage countries to compete?
Their lower costs offset their lower productivity.
65
What is the key insight of Engel’s law?
As income increases, food becomes a smaller share of total spending.
66
How do productivity and wages relate over time?
As productivity increases, wages tend to rise too.
67
What causes the flat portion of the export supply curve in Ricardian model?
Constant returns to labor and a linear PPF.
68
What does a shift from point A to point C on the world price line mean?
A move to higher utility through trade.
69
How are international prices determined?
Where Home's export supply = Foreign's import demand.
70
What determines Home’s export supply curve?
The quantity of wheat it exports at different world prices.
71
What determines Foreign’s import demand curve?
The quantity of wheat it wants to import at different prices.
72
What is the no-trade equilibrium also known as?
Autarky equilibrium or pre-trade equilibrium.
73
How do wages in autarky compare to wages with trade?
Wages in terms of goods are usually lower without trade due to limited consumption possibilities.
74
How does technology affect wages in the Ricardian model?
Better technology increases productivity, which raises wages.
75
How does China’s wage trend illustrate Ricardian predictions?
China’s wages rose with productivity, matching predictions that wages grow with absolute advantage.
76
What happened to Chinese wages between 2005–2015?
They increased fourfold due to labor shortages and minimum wage hikes.
77
Why are Chinese manufacturing wages now higher than in Southeast Asia or India?
Due to rapid wage growth driven by productivity gains and policy changes.
78
What does the Ricardian model say about labor productivity and wages?
Higher productivity leads to higher wages over time.
79
What is the impact of trade on domestic consumption possibilities?
It expands them beyond the production possibilities frontier (PPF).
80
What determines the slope of the indifference curve?
The marginal rate of substitution between two goods.
81
In trade equilibrium, what does the international price line represent?
The new consumption possibilities under trade.
82
What does it mean when a country is on a higher indifference curve after trade?
It has achieved higher utility or welfare.
83
Why can Foreign export cloth despite having lower productivity?
Because it has a comparative advantage and lower opportunity cost in cloth.
84
How do we calculate the real wage in terms of the other good?
Multiply the world price ratio by the marginal product of labor.
85
What does the Ricardian model assume about returns to labor?
It assumes constant returns to labor.
86
How does a country’s comparative advantage affect its trade pattern?
It exports goods for which it has a lower opportunity cost.
87
What is the economic significance of slide 102's 'extra questions'?
They test the understanding of how productivity and labor changes affect trade outcomes.

Inertnational Economics (6 decks)

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