Ricardian Trade Model.pdf - Ricardian Trade Model ECON 3500 Aaron Fraley Here Are The Basics 3 Key Assumptions \u25cf \u25cf \u25cf 2C 2G 1F \u25cb Two Countries

Ricardian Trade Model.pdf - Ricardian Trade Model ECON 3500...

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Unformatted text preview: Ricardian Trade Model ECON 3500 Aaron Fraley Here Are The Basics: 3 Key Assumptions ● ● ● 2C, 2G, 1F ○ Two Countries are involved who have the technology to produce two goods. One factor is implemented to produce these goods through labor. Labor is mobile in both economies, but does not cross borders. Perfect competition ( products are sold at market value and wages are adjusted accordingly) & full employment in either/both sector(s). Why Should Countries Trade? ● Price of good goes down when produced in higher quantities (advantage by mass production). ● Differences in climate, capital, labor, or technology. This has a crucial influence on price and production of goods. Example: Sausages USA 20 hours per unit 10 hours per unit Germany 25 hours per unit C A OM D P VA A N RA TA T G IVE E Cars ABSOLUTE ADVANTAGE Germany 30 hours per unit USA 20/10 = 2 25/30 = .83 10/20 = .5 30/25 = 1.2 Individual Production Costs for 50 Cars Germany USA Cars 20 hours per unit 25 hours per unit Sausages 10 hours per unit 30 hours per unit Germany 1000 hours USA 1250 hours 4250 hours Cost for 50 Sausages Trade (Comparative Advantage) 500 hours Germany USA 2500 hours Cost for 100 Cars Cost for 100 Sausages 1500 hours 1000 hours 3500 hours (750 hrs saved!!! Summary ★ Ricardian model proves that although a country might have an absolute advantage in both goods and services, trading still makes sense and is beneficial for both parties. ...
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