international economic

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Snnywnzrn

West Virginia University

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It is for economic class

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Classical (Ricardian) Model KOM: Chapter 3 p24-40 Instructor Shuichiro Nishioka Assumptions • There are two countries – A and B • They produces two homogeneous goods – T and S • With one factor input (labor) – PPF is a straight-line • Technology (labor-productivity) differs for both countries Country A Country B (120 workers) (120 workers) Workers required to produce 1 unit of T Workers required to produce 1 unit of S 2 workers 6 workers 4 workers 6 workers The information above (factor abundance and labor productivity) is all we need to understand the Ricardian model (1) Country A has absolute advantage in both goods because country A can produce both goods with fewer workers. (2) Country A (B) has comparative advantage in T (S). Autarky (No Int’l Trade) Country A Country B T T 60 CIC0 CA=PA CIC0 20 CB=PB PS/PT (slope=2) PS/PT (slope=1) 30 S 20 S Important Interpretations • Country A has absolute advantage in both goods. Country A (B) has comparative advantage in T (S) • Consumption point CA (CB) = Production point PA (PB) • S is relatively expensive (cheap) in country A (B) and T is relatively expensive (cheap) in country B (A) Free Trade & Motivation • If two countries start free trade, we need to set terms of trade (price ratio under free trade). Let’s say two countries agree to trade with P*S/P*T=1.5 (or TP*T=SP*S) • Country A – Under autarky: PS/PT=2 or PT/PS=0.5 – Under free trade: P*S/P*T=1.5 or P*T/P*S=0.667 • Country B – Under autarky: PS/PT=1 or PT/PS=1 – Under free trade: P*S/P*T=1.5 or P*T/P*S=0.667 • If trade regime changes from autarky to free trade, what happens to production? Results of Trade • Perfect Specialization (understand why?) – In country A, because PT/PS(=0.5)
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Running head: INTERNATIONAL ECONOMICS

International Economics
Student’s name
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INTERNATIONAL ECONOMICS

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A. Determine which country has a comparative advantage in which good.
The apple republic enjoys a comparative advantage in the production of textile since it
uses fewer units of labor to produce a unit of textile. While the banana republic uses 2 units of
labor to produce a unit of textile, the apple republic on the other side uses 1 unit of labor to
produce a unit of textile thus the apple republic should specialize in the production of textile
since its production will be cheaper than the banana republic. The banana republic on the other
hand enjoys a comparative advantage in the production of soybeans since; it uses 1 unit of labor
to produce a unit of soybeans whereas the apple republic uses 2 units of labor to produce a unit
of soybeans (Beaudreau, 2016). Theref...


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