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01_ProblemSet_1

The document is a problem set for an Introduction to International Economics course, focusing on the Ricardian Model and gains from trade. It includes questions on absolute and comparative advantage, production possibilities frontiers, and the effects of free trade between two countries producing cheese and wine. The problem set requires numerical and graphical analysis to demonstrate trade benefits and changes in consumption for both countries involved.

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4 views2 pages

01_ProblemSet_1

The document is a problem set for an Introduction to International Economics course, focusing on the Ricardian Model and gains from trade. It includes questions on absolute and comparative advantage, production possibilities frontiers, and the effects of free trade between two countries producing cheese and wine. The problem set requires numerical and graphical analysis to demonstrate trade benefits and changes in consumption for both countries involved.

Uploaded by

isayevanezrin1
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

Dr.

Alexandra Seidel
Introduction to International Economics

Problem Set 1

Gains from Trade and the Ricardian Model

1. Which of the following characterize the Ricardian Model?

(a) Perfect mobility of factors across industries


(b) Perfect mobility of factors across countries
(c) Constant returns to scale
(d) The law of diminishing returns
(e) Identical technologies across industries
(f) Identical technologies across countries
(g) Cournot competition
(h) Perfect competition

2. Suppose that Home (H) and Foreign (F) produce two goods, cheese (c) and wine (w).
In Home, 4 hours of labour are required to produce a unit of cheese and 2 hours to
produce a unit of wine. Foreign’s unit labour requirement in wine is 1, while in cheese
production it is 5. Assume that 600 hours of labour are available in Home and 300
hours of labour in Foreign.

Home aLC = 4 aLW = 2 L = 600


Foreign *
aLC =5 *
aLW =1 L* = 300

(a) For each good, which country has an absolute advantage?


(b) For each good, which country has the comparative advantage?
(c) Draw the production possibilities frontier for each country. What do the slopes
of the frontiers indicate?
(d) Calculate the autarky relative prices for each good.

Page 1
INTRODUCTION TO INTERNATIONAL ECONOMICS Problem Set 1

3. Suppose now that both countries open up to free trade at a relative price of cheese
pC / pW = 3 .

(a) Show numerically and graphically that trade is beneficial for both countries
and indicate which good is produced by which country.
(b) Suppose Home is endowed as previously with 600 hours of labour; however,
400 of those available for cheese production and 200 labour hours for wine
production. Home enters into trade with Foreign and exports 50 units of a good.
Has the consumption of both goods in Home changed? By how much?

L = 600 aLC = 4 aLW = 2 LC = 400 LW = 200 X = 50 pC / pW = 3

(c) Suppose Foreign is endowed as previously with 300 hours of labour; however,
200 of those available for cheese production and 100 labour hours for wine
production. Foreign enters into trade with Home and imports 50 units of a
good. Has the consumption of both goods in Foreign changed? By how much?

L* = 300
*
aLC =5 *
aLW =1 L*C = 200 L*W = 100 M * = 50 pC / pW = 3

Page 2

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