03%20The%20Ricardian%20Model,%20Part%202

03%20The%20Ricardian%20Model,%20Part%202 - 1 1 The...

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Unformatted text preview: 1 1 The Ricardian Model, Part 2 • Agenda – Autarky Equilibrium Revisited – International Trade Equilibrium – Ricardian Model Highlights – The Modern Ricardian Model 2 Autarky Equilibrium Revisited • Portugal : – a LW = 2 a LC = 1 L = 3,000 – Opportunity cost: a LC / a LW = 1/2 – Relative price: P C / P W = a LC / a LW = ½ – Wages: W C = P C / a LC = W W = P W / a LW 3 Portugal’s Autarky Equilibrium Q C Q W PPF CIC D W = S W D C = S C “A” 4 Autarky Equilibrium Revisited • England : – a* LW = 3 a* LC = 6 L* = 6,000 – Opportunity cost: a* LC / a* LW = 6/3 = 2 – Relative price: P* C / P* W = a* LC / a* LW = 6/3 = 2 – Wages: W* C = P* C / a* LC = W* W = P* W / a* LW 2 5 England’s Autarky Equilibrium Q* C Q* W PPF* CIC D* C = S* C D* W = S* W 6 Autarky Equilibrium Revisited Q C /Q W P C /P W a LC /a LW = 1/2 a* LC /a* LW = 2 RS RS* RD = RD* Q* C /Q* W Q C /Q W 7 Absolute, Comparative Advantage • Portugal has an absolute advantage over England in both cloth and wine production because: a LC < a* LC and a LW < a* LW 8 Absolute, Comparative Advantage • Portugal has a comparative advantage over England only in cloth production because: a LC / a LW < a* LC / a* LW 3 9 Absolute, Comparative Advantage • Alternatively, Portugal has a comparative advantage over England only in cloth production because: a LC / a* LC < a LW / a* LW 10 Absolute, Comparative Advantage • England has a comparative advantage over Portugal only in wine production because: a* LW / a* LC < a LW / a LC 11 International Trade Equilibrium • The (World) Relative Supply Curve • The (World) Relative Demand Curve • Relative Prices after Trade • The Gains from Trade • Relative Wages after Trade 12 The (World) Relative Supply Curve • The (world) relative supply curve , RS, of cloth is: – The quantity of cloth supplied in all countries relative to the quantity of wine supplied in all countries, ( Q C + Q* C ) / ( Q W + Q* W ) , – At each relative price of cloth, P C / P W . 4 13 The (World) Relative Supply Curve • Production decisions in both Portugal and England are given by: 1. If P C /P W > a LC / a...
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03%20The%20Ricardian%20Model,%20Part%202 - 1 1 The...

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