The Ricardian Model

Question 1

What does “opportunity cost” mean in the context of comparative advantage?

Answer 1

Opportunity cost is the amount of A that could have been produced using the same resources used to produce one more unit of B.

Question 2

What is comparative advantage? When does a country have it?

Answer 2

Comparative advantage is the ability of a country to produce a product/service more efficiently than another country,

A country has a comparative advantage in producing a good if the opportunity cost of producing that good in terms of other goods is lower in that country than it is in other countries.

Question 3

What does the Production Possibility Frontier show?

Answer 3

The different mixes of goods the economy can produce. The slope shows the opportunity cost of producing either product.

Question 4

What is the unit of measurement of the opportunity cost of ties in terms of jeans?

Answer 4

Jeans

Question 5

In the Ricardian model, the slope of the production possibilities frontier is constant. Why?

Answer 5

There is constant return to labour.

Question 6

Under the assumptions of the Ricardian model all countries gain from trade. True or false?

Answer 6

False. It depends on the equilibrium relative price. If it occurs in the vertical part of the RS curve,
both countries gain from trade. Otherwise, only one country benefits from trade

Question 7

Differences in wages across countries is due to what?

Answer 7

Different levels of productivity