02%20The%20Ricardian%20Model,%20Part%201

02%20The%20Ricardian%20Model,%20Part%201 - The Ricardian...

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1 1 The Ricardian Model, Part 1 • Agenda – Introduction and Assumptions – The Classic Ricardian Model in Autarky 2 Introduction There are 2 broad groups of theories to explain the pattern of international trade. 1. Differences in labor, physical capital, natural resources, and technology create productive advantages for countries. 2. Economies of scale, first mover advantage, and imperfect competition can also create productive advantages for countries. 3 Introduction •Th e Classic Ricardian Model explains how differences in labor productivity between countries affect the pattern of international trade. 4 Assumptions Assumption #1: There are only 2 countries. 1. Portugal, and
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2 5 Assumptions Assumption #2: There are only 2 goods. 1. Cloth, C, and 2. Wine, W. 6 Assumptions Assumption #3: Only 1 factor of production. 1. Labor, L. a. Labor is fully employed. b. The supply of labor in each country is fixed. c. Labor productivity in each country and each industry is constant but differs between industries and between countries. 7 Assumptions Assumption #4: Labor Mobility. 1. Labor is freely and costlessly mobile between industries within a country. 2. Labor is completely immobile between countries. 8 Assumptions Assumption #5: Production takes place under conditions of perfect competition . 1. Many small firms in each industry. 2. Firms choose output to maximize profits. 3. Output is homogeneous. 4. Free entry and exit of firms. 5. Perfect information.
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3 9 Assumptions Assumption #6: Consumption takes place under conditions of utility maximization . 1. Country indifference curves are assumed to be homothetic . 10 Assumptions Assumption #7: The Ricardian model is a general equilibrium model . 11
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This note was uploaded on 02/09/2011 for the course ECON 181 taught by Professor Kasa during the Fall '07 term at University of California, Berkeley.

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02%20The%20Ricardian%20Model,%20Part%201 - The Ricardian...

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