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Ricardian Model:

May 10, 2023

1: (10 points) Consider the 2×2 Ricardian Model. Let the following hold:

MANUFACTURE

PRODUCTIVITY (output per worker)

AGRICULTURE

PRODUCTIVITY (output per worker)

LABOUR ENDOWMENT

HOME

100

FOREIGN

100

a)
Draw the PPF for each country. Note: the data above is in terms of output per worker rather than input requirements.

b)
Identify each country’s opportunity costs in each sector. Interpret.

c)
Define comparative advantage and identify who has the CA in Manufactures? Agriculture? Explain.

d)
Show that a reallocation of resources within each country can raise world output. That is, shift labour within each country so that total world output in each sector rises. Explain the intuition behind it.

e)
Calculate autarchy wages and manufacturing prices in each country? Show and explain how you get your result. (Set P_A = 1) Hint: Set w = P_A * productivity_A to find w, then set w = P_M * productivity_mto find P_M. Check that profits are zero in both sectors and wages are the same across sectors.

f)
Using manufacturing prices as a guide, who will export what? Explain.

g)
What range must manufacturing prices be in to get free trade equilibrium? Explain. What range of prices ensures each country fully specializes?

h)
Show that real wages in each country will rise in the free trade equilibrium. That is, find nominal wages in autarchy and compare them to nominal wages under free trade. Then show that (average) wages rise faster than average prices.

2: (10 points) Now consider the following (I increase foreign productivity in manu

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