Intro and Ricardian Model

Question 1

What motivates trade?

Answer 1

The key motivation for countries to engage in trade is to obtain goods (and services) from abroad at a ‘lower cost’.
- Imports are the source of gains from trade
- Price differences motivate trade

Question 2

What are the endowments?

Answer 2

Endowments in economics refer to the initial holdings of resources, such as land, capital, or labor, that an individual, firm, or country possesses.

Question 3

What’s the difference between inter-industry and intra-industry trade?

Answer 3

Models based on cross-country differences explain trade in different goods between different countries. Such trade is called inter-industry trade.
Much of actual trade is in similar goods between similar countries. Such trade is called intra-industry trade. Similar goods are referred to as varieties of the same goods.

Question 4

What are Economies of Scale?

Answer 4

Economies of scale refer to the cost advantages that a firm can achieve as its level of output increases. In other words, as a firm produces more units of a good or service, its average cost per unit decreases.

Question 5

What’s the main idea of the Ricardian model?

Answer 5

Technological differences across countries lead to trade and gains from trade.
Key insight: comparative advantage, not absolute advantage drives trade.
The baseline Ricardian model features one factor of production only (labor), two goods, and two countries.

Question 6

What does Autarky mean?

Answer 6

Autarky in economics refers to a state where a country or region aims to be entirely self-sufficient, producing all goods and services it needs internally without relying on international trade.

Question 7

Ricardian model: when are both goods produced?

Answer 7

Both goods are produced if marginal revenue products in both sectors are identical: w = p1/a1 = p2/a2

Question 8

What is the PPF?

Answer 8

The Production Possibility Frontier (PPF) is a graphical representation illustrating the maximum output combinations of two goods or services that an economy can produce given its resources and technology, assuming full efficiency and all resources fully utilized.

Question 9

Ricardian model: explain what happens with Free Trade
(Home comparative advantage in good 1)

Answer 9

graph page 5

Question 10

What do homothetic preferences mean?

Answer 10

Homotheticity in economics means that relative consumption or production remains constant regardless of changes in income or output levels.