2 - RICARDIAN MODEL Flashcards
WHAT IS COMPARATIVE ADVANTAGE?
Comparative advantage is when a country can produce a good at a lower opportunity cost compared to other countries.
WHAT IS ABSOLUTE ADVANTAGE?
Absolute advantage is when a country can produce more of a good with the same resources compared to others.
WHAT ARE THE MAIN IDEAS OF THE RICARDIAN MODEL?
The Ricardian model explains how countries benefit from trade by focusing on comparative advantage, with labor as the only factor of production, and trade driven by differences in labor productivity.
WHAT IS THE PRODUCTION POSSIBILITY FRONTIER (PPF)?
The PPF shows all combinations of goods a country can produce using all its labor.
In the Ricardian model, it’s a straight line because there’s only one factor—labor.
HOW DO COUNTRIES BENEFIT FROM TRADE ACCORDING TO THE RICARDIAN MODEL?
Countries benefit from trade by specializing in goods in which they have a comparative advantage, leading to mutual gains even if one country has an absolute advantage in everything.
WHAT IS THE OPPORTUNITY COST IN THE CONTEXT OF THE RICARDIAN MODEL?
The opportunity cost is the amount of one good that must be given up to produce more of another good, represented by the slope of the PPF.
WHAT ARE THE ASSUMPTIONS OF THE RICARDIAN MODEL?
The Ricardian model assumes two countries, two goods, labor as the only input, constant returns to scale, and perfect competition in goods and labor markets.
HOW IS THE AUTARKY EQUILIBRIUM DEFINED?
In autarky (no trade), equilibrium is defined by the relative prices and quantities of goods, where both goods are produced and prices reflect the opportunity costs of production.
WHAT IS THE FREE-TRADE EQUILIBRIUM IN THE RICARDIAN MODEL?
In free trade, each country specializes in the good where it has a comparative advantage, and world equilibrium is defined by the intersection of world relative supply and demand.
WHAT ARE THE GAINS FROM TRADE ACCORDING TO THE RICARDIAN MODEL?
Gains from trade arise because trade expands consumption possibilities beyond what countries could achieve in autarky, allowing each country to consume more than it could produce on its own.
