Ricardo - ECO 364 - Topic 2 The Ricardian Model Kunal...

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Unformatted text preview: ECO 364 - Topic 2 The Ricardian Model Kunal Dasgupta Dasgupta (UofT) Ricardian model 1 / 30 Road map 1 Historical context 2 Autarky 3 Trade equilibrium 4 Evidence Dasgupta (UofT) Ricardian model 2 / 30 Historical context Economic backdrop During the late 18th century, the dominant school of thought was mercantilism . Mercantilists believed that exporting was good since it brought gold and silver into the country, while importing was bad because it drained gold and silver from the national treasury. Mercantilists supported the imposition of high import tariffs. In the UK, the Mercantilist view manifested itself in the passing of the Corn Laws in 1815 - trade barriers intended to protect corn growers from cheaper imports. Dasgupta (UofT) Ricardian model 3 / 30 Historical context Ricardos difficult idea David Ricardo (1772-1823), a British economist, was in favor of free trade. Ricardo proposed the idea that countries could benefit from trade without adopting a beggar-thy-neighbor policy. Ricardo showed that even if trade were (a) balanced and (b) free, countries could still gain from trade - all they have to do is export those goods in which they have comparative advantage . More importantly, Ricardo showed that two countries could gain from trade even if one of them was more productive in every industry compared to its trading partner. Dasgupta (UofT) Ricardian model 4 / 30 Autarky Basics Two goods - cloth and wheat. Two countries - Home and Foreign. One factor - labor. One Home worker can produce 4 bushels of wheat and 2 yards of cloth. = MPL W = 4; MPL C = 2. Dasgupta (UofT) Ricardian model 5 / 30 Autarky Production possibility Number of workers in the Home country, L = 25. If all workers are employed in wheat production, Q W = MPL W L = 100 . If all workers are employed in cloth production, Q C = MPL C L = 50 . Home can transform cloth into wheat at a constant rate - there are no diminishing returns in the Ricardian model. Dasgupta (UofT) Ricardian model 6 / 30 Autarky Production possibility Dasgupta (UofT) Ricardian model 7 / 30 Autarky Demand The PPF captures the supply side of an economy....
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Ricardo - ECO 364 - Topic 2 The Ricardian Model Kunal...

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