09 The Ricardian Model

Question 1

What is the Ricardian Model for?

Answer 1

The Ricardian Model is a framework for differences between countries, comparative advantage

Comparing autarky with free trade allows us to analyze what trade does.

Question 2

Opportunity cost

Answer 2

The loss of other alternatives when one alternative is chosen

Question 3

Comparative advantage

Answer 3

The country with the lowest opportunity cost of producing a good has a comparative advantage in that good

Question 4

Due to the ____ property of opportunity costs, a country can’t have a comparative advantage in both goods.

Answer 4

Due to the reciprocal property of opportunity costs, a country can’t have a comparative advantage in both goods.

Question 5

absolute advantage

Answer 5

The country with the lowest cost of producing a good has an absolute advantage in that good

Question 6

_____ advantage has no importance at all for the pattern of trade.

Answer 6

Absolute advantage has no importance at all for the pattern of trade.

Question 7

We’ll see that _____ advantage is what determines the pattern of trade.

Answer 7

We’ll see that comparative advantage is what determines the pattern of trade.

Question 8

absolute advantage is important for _____

Answer 8

absolute advantage is important for the international distribution of income.

Question 9

a country, state, or society that is economically independent

Answer 9

autarky

Question 10

RS curve

Answer 10

Relative supply as a function of relative price

Question 11

RD curve

Answer 11

Assuming that every consumer spends half of her income on rice and half on cocoa:

P^RQ^R_d = P^CQ^C_d

Q^R_d / Q^C_d = P^C / P^R = 1 / (P^R / P^C)

Question 12

The Ricardian Model: The budget line

Answer 12

wL = P^CQ^C_d + P^RQ^R_d

Q^C_d = wL / P^C + (P^R / P^C) Q^R_d

Question 13

The Ricardian Model: Optimal consumption

Answer 13

Insert preferences into budget line

Question 14

RS curve: Trade

Answer 14

We combine the autarky RS curves as follows.

• Relative price 1 < PR/PC < 3 :
  Complete specialization −→ trade.
• Relative price < 1 or > 3 :
  Both countries produce the same good (not an equilibrium if consumers value both goods).
• Relative price = 3:
  Nigeria produces both goods, America specialize in rice.
• Relative price = 1:
  Nigeria specialize in cocoa, America produces both goods.

Question 15

Relative quantity during complete specialization

Answer 15

Question 16

The ricardian Model: RS & RD during trade

Answer 16

Question 17

The Ricardian Model: How to analyze what trade does to human well-being?

Answer 17

Inspect the budget lines in autarky and trade

Question 18

IRS and three types of IRS

Answer 18

Increasing returns to scale (IRS).

IRS is a reason for trade: Motive to concentrate production of each product in one spot.

Three types of IRS: Internal, external national, and external international.

Question 19

In serving a foreign market, stronger ____ argues for exporting, but higher tariffs or transport costs argue for local production via ___.

Answer 19

In serving a foreign market, stronger Increasing Returns to Scale (IRS) argues for exporting, but higher tariffs or transport costs argue for local production via Foreign Direct Investmen (FDI).