Reference no: EM133083439
Problem Set: Ricardian Model
Consider the Ricardian model with two countries and two goods (lumber and car). Suppose that in Country A, each unit of labor can produce 2 units of lumber or 0.25 units of car. In Country B, each unit of labor can produce 1 unit of lumber or 0.5 units of car.
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Lumber (L)
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Car (C)
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Country A
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aLLA =
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aLCA =
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Country B
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aLLB =
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aLCB =
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a. Fill in the table on the right for the number of units of labor per unit of output.
b. Which country has an absolute advantage in lumber production?
c. Which country has an absolute advantage in lumber production?
d. Which country has a comparative advantage in lumber production?
e. Which country has a comparative advantage in car production?
f. If the international price of lumber relative to car is PL/PC is equal to ¼ (i.e., 4 units of lumber are needed to get one unit of car), what is the pattern of trade between Country A and Country B.
g. Construct the world relative supply curve of lumber.
h. Calculate the gains from trade (if any) for the two countries at the international price of PL/PC = ¼.
i. Calculate the wage ratio WA/WB at the international equilibrium. Explain
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