Ricardo Comparative Advantage

Question 1

Why are there gains from trade?

Answer 1

there are differences in the productivity of labor between countries which create productive differences

Question 2

What usually explains differences in productivity?

Answer 2

technology

Question 3

Comparative Advantage

Answer 3

a country has a comparative advantage in producing a good if the opportunity cost of producing that good is lower in the country than it is in other countries

Question 4

production possibilities frontier

Answer 4

shows the maximum amount of goods that can be produced for a fixed amount of resources

Question 5

what is the slope of the PPF?

Answer 5

when the economy uses all of its resources the opportunity cost is equal to the absolute value of the slope of the PPF and it is constant because unit labor requirements are constant

Question 6

when are there gains from trade?

Answer 6

when a country exports a good it has a comparative advantage in

Question 7

Ricardian prediction on relative prices

Answer 7

will equalize after trade

Question 8

Ricardian prediction on relative wages

Answer 8

will not necessarily equalize after trade - difference in productivity determine relative wages

Question 9

what does Ricardian model suggest?

Answer 9

that countries should completely specialize

Question 10

why does complete specialization rarely happen?

Answer 10

1. more than one factor of production reduces this tendency
2. protectionism
3. transportation costs, reducing or preventing trade
4. there are non-traded goods and services (large fraction of national economy)

Question 11

how can gains from trade be explained?

Answer 11

comparative advantage

Question 12

what happens to the price of the good in which the country has a comparative advantage?

Answer 12

the prices goes up because the market just expanded for it, the new prices will be between the domestic and foreign pre-trade prices