Ricardian model - production possibilities frontier, Microeconomics

Suppose there are two countries (home and foreign) and that two goods can be produced within those countries: machinery (M) and bread (B). Marginal product of labor (MPL) is given in the table:


Home country MPL

Foreign country MPL







There are 100 workers in Home country and 200 workers in Foreign country (LH=100 and LF=200)

In autarky

1. Graph the Production Possibilities Frontier (PPF) and Consumption Possibilities Frontier (CPF) for both countries. What is the opportunity cost of machinery measured in terms of bread output foregone in each country?

2. A) What does the labor market arbitrage imply for the wage paid to machinery workers relative to bread workers in the foreign country? 

B) Derive the price of Machinery relative to the price of Bread in both Home and Foreign

Now allow the two countries to trade

3. Which product would the Home country export when it opens to trade?  How does this change its position on the PPF - show graphically and explain.

4. Can the world price of Machinery relative to the world price for Bread be less than ¼ ?  Explain.

5. Suppose that world price of Machinery relative to Bread is ½.   

a. Supposing that each country completely specializes in its comparative advantage good, draw the new CPF for each country. 

b. What is the wage of Home country relative to the wage of Foreign?

6. We can also look at the real wage of workers before and after autarky by comparing the purchasing power of their wages, that is wages divided by the price of the goods they consume.

a. In autarky, what is the real wage of Home workers measured in terms of Machinery, and the real wage of Home workers measured in terms of Bread?

b. Recalculate these real wages if the world price of machinery relative to bread after trade is ½.

The next few questions examine how changes in regulation could affect productivity, output, and comparative advantage in a Ricardian model.  There are two countries, US and China, producing in two industries, computer software (s) and paper (p).  Paper production generates waste in the form of water pollution.

Unregulated Case

US  unit labor requirement

China unit labor requirement







7. Initially neither country regulates water pollution so the unit input requirements are those described above.  Given these values, which country has an absolute advantage in paper production?  Which country will export paper?

8. Suppose now the US regulates water pollution, which doubles the unit labor requirement for paper production in the US.  Input requirements for software are not affected and China imposes no regulation.

a. The US has 100 workers.  Draw the US PPF with and without regulation.

b. If the US is in autarky, how would this regulation affect quantities of output, consumption, and water pollution in the US?

9. If the US and China can trade,

a. Which country will export paper?

b. Compare the quantity of US water pollution in three cases: autarky, autarky + regulation, free trade + regulation?  Given that analysis, do you think free trade is good or bad for the environment?

Facts About Globalization...

10. Compare three forms of globalization:  international migration, trade in merchandise, and flows of international capital.  Which of these have grown fastest in the last 40 years?

11. Using the ratio of trade/GDP as a measure of an economy's international "open-ness",

a. is the US relatively open or closed compared to the rest of the world?  Speculate as to the reason for this difference.

b. How can Hong Kong and Malaysia have a trade/GDP ratio greater than 100% ?

12. Compare the time series on trade/GDP in Figure 1-3 to the time series on tariffs in Figure 1-4. 

a.  What is the connection between these two? 

b.  Does it provide you with any possible predictions for how governments will respond to the deep worldwide recession currently underway?

Posted Date: 3/2/2013 12:04:57 AM | Location : United States

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