Ricardian Model Flashcards
Explain the general Idea of the Ricardian Model
The ricardian model is a story based on productivity and comparative advantage. That is, trade between countries is based not on an absolute advantage. Given 2 countries, even if one is better at making both goods than the other, trade should occur given that opportunity costs arise when one cuntri decides do make a good.
Explain the main assumptions of the ricardian model.
- We abserve trade between 2 countries
- Constant return to scale are present
- Competitive markets
- One input in the production function
- The input is perfectly mobile within a country
Draw and explain, with a visual representation, the ricardian model.
1
Explain why wages do not matter in the interpretations of the model?
Sine pi = 0, then pi = 0 = pricequantity - wagelabor,
pricequantity = wagelabor, s.t real wages are always the same.
Given an example, sort the winners and the loosers given a trade opening. Also, give a brief explanation as to why utility decreases or increases given an opening to trade.
1
Give an equation and an explanation of the wage in foreign and domestic. Also explain the implications of an opening on the wages in both countries.
1
Give an explanation as to where the world price of goods should be given an opening in trade.
1
Draw an explain the demand and supply curves for the ricardian model with 2 goods. Explain the 4 cases.
1
Explain, with a visual aide, why both countries are better-off with trade.
1
Give an explanation of the changes made to the model to account for multiple goods and transportation costs.
1
Give a summary of the conclusion of the model.
Trade between two countries can benefit both if each country exports the good in which it has a comparative advantage.
If one idea could be taken away from trae theory, from what we’ve seen as of now, what would it be ?
Trade expands the economy’s choices.
Explain what would happen if 2 countries producing 1 good and with different wage rates were to open trade to each other?
1
