Ricardian Model Flashcards
(18 cards)
What is the Ricardian model in international trade?
It is a model that explains trade patterns by differences in technology across countries, focusing on comparative advantage.
What are the primary reasons countries trade?
Differences in technology, resources, proximity, and offshoring costs.
What is comparative advantage?
A country has a comparative advantage in producing a good if its opportunity cost of producing that good is lower than in other countries.
What is absolute advantage?
A country has absolute advantage if it can produce more of a good with the same resources compared to another country.
What does a production possibilities frontier (PPF) show?
The relationship between the maximum production of one good for a given level of production of another good.
How is opportunity cost reflected in the PPF?
As the slope of the PPF — the amount of one good that must be given up to produce more of another good.
In the Ricardian model, what determines the pattern of trade?
Comparative advantage — countries export goods they can produce at lower opportunity costs.
What assumptions does the Ricardian model make?
Two countries, two goods, labor is the only input, and constant marginal productivity of labor (no diminishing returns).
Why does the PPF in the Ricardian model appear as a straight line?
Because the marginal product of labor is constant, meaning there are no diminishing returns.
How are wages determined in the Ricardian model?
Wages are equal to the price of the good multiplied by the marginal product of labor (P × MPL).
What happens to consumer utility when a country engages in trade?
Consumer utility increases due to access to a higher indifference curve — this demonstrates gains from trade.
How is the international trade equilibrium determined?
By the relative price at which a country’s export supply equals another country’s import demand.
What is meant by ‘terms of trade’?
The price of a country’s exports divided by the price of its imports.
Why can a country with absolute disadvantage still benefit from trade?
Because comparative advantage depends on relative opportunity costs, not absolute productivity.
How does international trade affect real wages in the Ricardian model?
Real wages increase as countries can now trade goods for which they have comparative advantage, allowing greater consumption bundles.
What is the implication of absolute advantage for wages?
Countries with higher productivity (absolute advantage) tend to have higher wages.
What does the Prebisch-Singer hypothesis argue?
That the terms of trade for primary commodities decline over time relative to manufactured goods.
What is Engel’s law and how does it support the Prebisch-Singer hypothesis?
As incomes rise, people spend a smaller share on food, reducing demand growth for primary commodities.
