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Ricardian model of trade

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Describe how relative supply and relative demand curves are determined in a single factor Ricardian model of trade.

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Ricardian model of trade is emphasized.

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This example should make the idea of relative demand and relative supply easier to grasp. Consider two countries: Home and Foreign, producing two goods Clothing and Food, using just one resource: labor. The following table provides the labor requirements to produce one unit of each product in each country. Following the notation as in the class we have the following:

(see attached file)

Consider the case of Home to begin with. Home has 1000 hours of labor and can produce one unit of clothing in 2 hours and one unit of food in 4 hours. Thus each unit of clothing at Home costs 2 units of food, and each unit of food costs 1/2 unit of clothing. If Home uses all resources to make clothing it makes 500 units of clothing. On the other hand if Home uses all resources to make food they can manage 250 units of food. Without trade the price of one unit of cloth at Home should be the same as the price of 1/2 units of food. For the Foreign nation the numbers are different. They have 2000 hours of labor and can produce clothing in 16 hours, but need 8 hours to make one unit of food. If they utilize all resource to make clothing they can manage 125 units of cloth and if they produce only food they can produce 250 units of food. Without trade each unit of clothing costs twice as much as food. When the countries start trading the Ricardian model predicts ...

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