Reference no: EM133063420

In his "Comparative Advantage" example British Political Economist David Ricardo described the following example. Two countries, England and Portugal fully employ all of their workers producing cloth and wine. It takes England 120 million worker years to produce the 1 billion barrels of wine it needs for domestic consumption and 100 million worker years to produce the 1 billion square yards of cloth it needs for domestic consumption. It takes Portugal 80 million worker to produce its 1 billion barrels of wine needs and 90 million workers to produce its 1 billion square yards of cloth needs.

-Graph the production possibilities confronting each country.

-What are the opportunity cost ratios in each country before trade?

-Assuming initial international price ratios are equal to domestic labor cost ratios in each country, would it make sense for Portuguese traders to buy English cloth or wine?

-Assume that "Hume's species flow mechanism" works so that Portuguese prices eventual rise (in terms of international trading prices) so that 1 barrel of Porto wine trades for 1 square yard of English cloth, what are the consumption possibility curves facing each country after trade?

-Ricardo thinks that the end result of "free trade" will be that Portugal will specialize in wine, England in cloth, and that both countries will continue to fully employ all their workers and enjoy balanced trade with each other (i.e. they will not experience trade deficits or surpluses), and be able to consume more than they had before trade. Was Ricardo correct?