Lecture3

# Lecture3 - Ricardian Model Equalization of wages implies...

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Ricardian Model Equalization of wages implies: The right hand side is the slope of the PPF and the opportunity cost of obtaining one more bushel of wheat. The left hand side is the relative price of wheat. W W C C W C C W P MPL P MPL P MPL P MPL ⋅ = ⋅ =

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Ricardian Model • The price ratio, P W /P C , always denotes the relative price of the good in the numerator, measured in terms of how much of the good in the denominator must be given up. The slope of the PPF equals the relative price of wheat, the good on the horizontal axis.
Ricardian Model The Foreign Country Assume Foreign’s technology is inferior to Home’s. Foreign has an absolute disadvantage in producing both wheat and cloth as compared to Home.

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Ricardian Model The Foreign Country Foreign Production Possibilities Frontier Assume a Foreign worker can produce one bushel of wheat or one yard of cloth. • MPL* W = 1, MPL* C = 1 Assume there are 100 workers available in Foreign. If all workers were employed in wheat they could produce 100 bushels. If all workers were employed in cloth they could produce 100 yards.
Ricardian Model Figure 2.3

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Ricardian Model Opportunity Costs for Goods in Home and Foreign Cloth (1 Yard) Wheat (1 Bushel) Home 2 Bushels of Wheat ½ Yard of Cloth Foreign 1 Bushel of Wheat 1 Yard of Cloth
Ricardian Model We can see that Foreign has a comparative advantage in producing cloth. Foreign’s Opportunity cost of cloth is lower. Home has a comparative advantage in producing wheat. Home’s opportunity cost of wheat is lower.

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Ricardian Model Equilibrium in Foreign Foreign’s preferences also represented by indifference curves. The no-trade (autarky) relative price of wheat is
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Lecture3 - Ricardian Model Equalization of wages implies...

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