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The Ricardian Model

PPF H. PPF H. PPF F. Relative price. Relative price. Relative price. R S. R D. The pattern of trade The gains from trade. equilibrium. The Ricardian Model. Trade in a One-Factor World. Absolute Advantage

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The Ricardian Model

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  1. PPFH PPFH PPFF Relative price Relative price Relative price R S R D The pattern of trade The gains from trade equilibrium The Ricardian Model

  2. Trade in a One-Factor World • Absolute Advantage • A country has an absolute advantage in a production of a good if it has a lower unit labor requirement than the foreign country in this good. • Assume that aLC < a*LC and aLW < a*LW • This assumption implies that Home has an absolute advantage in the production of both goods. Another way to see this is to notice that Home is more productive in the production of both goods than Foreign. • Even if Home has an absolute advantage in both goods, beneficial trade is possible. • The pattern of trade will be determined by the concept of comparative advantage. • 舉例

  3. Trade in a One-Factor World • Comparative Advantage • Assume that aLC /aLW < a*LC /a*LW (2-2) • This assumption implies that the opportunity cost of cheese in terms of wine is lower in Home than it is in Foreign. • In other words, in the absence of trade, the relative price of cheese at Home is lower than the relative price of cheese at Foreign. • Home has a comparative advantage in cheese and will export it to Foreign in exchange for wine. • 舉例

  4. Foreign wine production, Q*W, in gallons F* P* Foreign cheese production, Q*C , in pounds Trade in a One-Factor World Figure 2-2: Foreign’s Production Possibility Frontier L*/a*LW -? +1 L*/a*LC

  5. If PC* PW * PC* PW * PC* PW * aLC *aLW * aLC *aLW * aLC *aLW * • If > < = • If Trade in a One-Factor World : then Foreign will specialize in the production of cheese. : then both goods be produced. : then Foreign will specialize in the production of wine.

  6. PPFH PPFF PPFF Relative price Relative price Relative price R S R D The pattern of trade The gains from trade equilibrium The Ricardian Model

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