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Trade and Technology:
The Ricardian Model
1. At the beginning of the chapter there is a brief quotation from David Ricardo; here
is a longer version of what Ricardo wrote:
England may be so circumstanced, that to produce the cloth may require the labour of
100 men for one year; and if she attempted to make the wine, it might require the labour
of 120 men for the same time. . . .To produce the wine in Portugal, might require only the
labour of 80 men for one year, and to produce the cloth in the same country, might require
the labour of 90 men for the same time. It would therefore be advantageous for her to export
wine in exchange for cloth. This exchange might even take place, notwithstanding that the
commodity imported by Portugal could be produced there with less labour than in England.
Suppose that the amount of labor he describes can produce 1,000 yards of cloth or
1,000 bottles of wine in either country. Then answer the following:
a. What is England’s marginal product of labor in cloth and in wine, and what is
Portugal’s marginal product of labor in cloth and in wine? Which country has
absolute advantage in cloth and in wine, and why?
Answer: In England, 100 men produce 1,000 yards of cloth, so MPLC
5
1,000/100 5 10. 120 men produce 1,000 bottles of wine, so MPLW
5
1,000/120 5 8.3. In Portugal, 90 men produce 1,000 yards of cloth, so
MPL*
C
5 1,000/90 5 11.1. 80 men produce 1,000 bottles of wine, so
MPL*
W
5 1,000/80 5 12.5. So Portugal has an absolute advantage in both cloth
and wine, because it has higher marginal products of labor in both industries
than does England.
b. Use the formula PW/PC
5 MPLC/MPLW to compute the no-trade relative price
of wine in each country. Which country has comparative advantage in wine, and
why?
Answer: For England, PW/PC
5 MPLC/MPLW
5 10/8.3 5 1.2, which is the
no-trade relative price of wine (equal to the opportunity cost of producing
wine). So the opportunity cost of wine in terms of cloth is 1.2, meaning that to
S-7
2
produce 1 bottle of wine in England, the country gives up 1.2 yards of cloth. For
Portugal, P*
W/P*
C = MPL*
C/MPL*
W
5 11.1/12.5 5 0.9, which is the no-trade
relative price of wine (equal to the opportunity cost of producing wine). The
no-trade relative price of wine is lower in Portugal, so Portugal has comparative
advantage in wine, and England has comparative advantage in cloth. Portugal
has comparative advantage in producing wine because it has lower opportunity
cost (P*
W/P*
C = 0.9) than England in the production of wine (PW/PC = 1.2).
2. Suppose that each worker in the Home country can produce three cars or two TVs.
Assume that Home has four workers.
a. Graph the production possibilities frontier for the Home country.
Answer: See the following figure.
b. What is the no-trade relative price of cars at Home?
Answer: The no-trade relative price of cars at Home is PC/PTV
5 2/3 =
MPLTV/MPC. It is the slope of the PPF curve for Home.
3. Suppose that each worker in the Foreign country can produce two cars or three TVs.
Assume that Foreign also has four workers.
a. Graph the production possibilities frontier for the Foreign country.
Answer: See following figure.
S-8 Solutions n Chapter 2 Trade and Technology: The Ricardian Model
MPLTV ·
L
TV, QTV
(units)
Q
C
1
Slope
(
MPLTV /MPLC
)
2/3
8
Q
C
2/3
MPLC ·
L
12
Car,
Q
C (units)
TV, Q
*
TV
(units)
MPL
*
TV
·
L*
12
MPL
*
C ·
L*
8
Slope
(
MPL
*
TV
/MPL
*
C
) 3/2
Cars,
Q*
C (units)
Solutions n Chapter 2 Trade and Technology: The Ricardian Model S-9
TV, QTV
(units)
TV, QTV
(units)
8
912
2
12
9
28
Slope
2/3
Slope
3/2
A*
A
Car,
Q
C (units)
Car,
Q*
C (units)
U1
U
*
1
PPF *
PPF
Home
Foreign
b. What is the no-trade relative price of cars in Foreign?
Answer: The no-trade relative price of cars in Foreign is P*
C/P*
TV = 3/2 =
MPLTV/MPL*
C, or the slope of the PPF curve for the Foreign country.
c. Using the information provided in Problem 2 regarding Home, in which good
does Foreign have a comparative advantage and why?
Answer: Foreign has a comparative advantage in producing televisions because
it has a lower opportunity cost than Home in the production of televisions.
4. Suppose that in the absence of trade, Home consumes nine cars and two TVs and
Foreign consumes two cars and nine TVs. Add the indifference curve for each
country to the figures in Problems 2 and 3. Label the production possibilities fron-
tier (PPF), indifference curve (U1), and the no-trade equilibrium consumption and
production for each country.
Answer: See following figures.
5. Now suppose the world relative price of cars is PC/PTV
5 1.
a. In what good will each country specialize? Briefly explain why.
Answer: Home would specialize in cars, export cars, and import televisions,
whereas the Foreign country would specialize in televisions, export televisions,
and import cars. The reason is because Home has a comparative advantage in
cars and Foreign has a comparative advantage in televisions. The relative price
of a car in home is (PC/PTV = 2/3), which is lower than the world price of 1. So
Home will export cars and earn a profit. The world relative price of a television
is 1, higher than that in Foreign (P*
TV/P*
C = 2/3). So Foreign will specialize in
producing televisions, and export televisions to the world market.
b. Graph the new world price line for each country in the figures in Problem 4 and
add a new indifference curve (U2) for each country in the trade equilibrium.
Answer: See the following figures.
S-10 Solutions n Chapter 2 Trade and Technology: The Ricardian Model
TV, QTV
(units)
8
9812
2
4
Slope
1
C
B
A
Car,
Q
C (units)
U2
Import
Export
Home
50
50
60
60
100
C*
A*
D*
Wheat,
Q*
W
(bushels)
Slope
2/3
U
*
2
U
*
3
U
*
1
Foreign
Slope
1/2
