This problem set helps you review the Ricardian model. You may discuss in groups, with each group up to 5 students. But you need to write down your homework by yourself. 1. Regarding Ricardian Model: (a) State the economic questions it asks, the key model assumptions, and key predictions of the model. (b) Now think like an empirical trade economists. If you are going to provide empirical evidence to test Ricardian model, what are you going to test? Explain why it is a good test of Ricardian model. List at least three tests to the model. [NOTE: Be innovative and do not limit to the lecture notes.] 2. In the 2 goods 2 countries case, explain the welfare gains from a simple Ricardian model. Refer to Slide 15 in the lecture note “2 1RicardianModel.pdf”: (a) In the complete specialization case (when relative demand is RD), what are the gains from international trade for each country? Use the changes in consumption possibility frontier (CPF), similar to that on slide 16, to illustrate the idea. (b) In the incomplete specialization case (when relative demand is RD’ in the figure on slide 15), what are the gains from international trade for each country? Use the changes in consumption possibility frontier (CPF), similar to that on slide 16, to illustrate the idea. In particular, does Home country have gains from international trade given that it still produces both products after trade? [We thank a student for asking this great question in class.] 3. Based on the insight of Ricardian model, please comment on the following claims with a solid argument: high wage countries cannot compete with developing countries who has lower wage rates. 4. (Ricardian Model: Autarky Economy) Two countries, Home and Foreign, use one factor, labor, to produce two goods, Shoes and Computers. The Home country can produce Shoes with 1 unit of labor and Computers with 2 units of labor. The Foreign country can produce Shoes with 4 units of labor and Computers with 5 units of labor. Home country is endowed with a labor force of 200 units, while Foreign country is endowed with a labor force of 100 units. Preferences are the same in the two countries and are described by the following utility function: U(S, C) = 0.5 ln S + 0.5 ln C, where S and C refer to the consumption quantity of shoes and computers, respectively. (a) Which country has an absolute advantage in producing Shoes? Which country has an absolute advantage in producing Computers?
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