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technology. The set of all possible combinations of output of good 0 and good 1 would be 8 < : ( y 0 ; y 1 ) : 0 ° y ! ° max f z !; H ; z !; F g l ! , X ! 2f 0 ; 1 g l ! ° L H + L F 9 = ; : This is just like a budget set with prices 1 = max f z !; H ; z !; F g and income L H + L F . But labor is not mobile in a Ricardian economy. This means that the production possibility set is really Y = 8 < : ( y 0 ; y 1 ) : 0 ° y ! ° z !; H l !; H + z !; F l !; F , 0 ° l !;i , X ! 2f 0 ; 1 g l !;i ° L i 9 = ; : What does this look like? Suppose we want to produce as much of good 0 as possible. There is only one way to do this: allocate all labor everywhere to the production of good 0 . World output would be z 0 ; H L H + z 0 ; F L F units of good 0 , and nothing of good 1 . Similarly, the most the world can produce of good 1 is z 1 ; H L H + z 1 ; F L F , and this would imply no output of good 0 . The question is now: how should labor be allocated in the two countries if we want to produce some amount of good 0 , and given that amount, as much as possible of good 1 ? 2.1.1 Comparative Advantage Start out with everyone producing good 0 . Suppose we want to produce one unit of good 1 in the home country. This requires 1 =z 1 ; H units of labor that has to taken from the production of good 0 . The cost of 1 unit of good 1 is thus z 0 ; H =z 1 ; H units of good 0 in the home country. Similarly, the cost of 1 unit of good 1 is z 0 ; F =z 1 ; F units of good 0 in the foreign country. Suppose that z 0 ; H z 1 ; H
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