Unformatted text preview: Ricardian Trade
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
● 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
E Cars ABSOLUTE ADVANTAGE Germany 30 hours per unit USA
20/10 = 2 25/30 = .83 10/20 = .5 30/25 = 1.2 Individual
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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- Fall '11