The Ricardian Model

Question 1

What characteristics does the Ricardian model have?

Answer 1

• 2 Countries, Home and Foreign*
• Many goods - N ->large
• 1 factor Labour mobile across sectors, immobile across Countries (L and L*)
• Same preferences across countries
• Perfect competition

Question 2

How is the technology described in the model?

Answer 2

• Technologies with constant return to scale
  
  • Different across sectors
  • Different across countries (this is the source of comparative advantage)

Question 3

What is absolute advantage in the model?

Answer 3

• The country who is most productive exports their goods

Question 4

Explain how technology works in the model

Answer 4

ai(*) is equal to the number of home (foreign) workers

• We need ai units of L to produce 1 unit of good i:
  Qi=Li/ai

Ai = a1/a2 = MgPrL1/MgPrL2 = Opportunity cost of producing good 1 in terms of good 2.

Question 5

What is the optimal price?

Answer 5

Pi=wai*

Question 6

Who ends up producing good i?

Answer 6

The country that sells it cheaper

- Home specializes in goods i with Pi ai/ai > w/w

Question 7

How is the relative wage determined?

Answer 7

Supply = demand of home produced goods
The Ai = ai/ai represents the supply for a given relative wage w/w
All this depends on technology
Demand depend on preferences and relative mass of consumers

Question 8

How is the Demand side described?

Answer 8

B(i, L*/L)

- increasing in L