Question

Consider the Ricardian trade model with zero tariffs and transportation costs between two countries (a) Are the output prices equalized between the two trading countries? Explain. No because τ -7 n processo ]he

Answer 1

in ricardian trade model two countries trade with each other according to there comparitive advantage in production of a traded good. for example if india and china are two countries and india has comparitive advantage over china in production of cloth and china has comparitive advantage over india in production of wine then india will produce and export cloth and china will produce and export wine and this way both the countries will be well off than before. in this case the output prices be equalised between two trading countries if there is no transportation and tariffs are involved.

to make a clear understanding we can say that:-

p = p* + tariff + Transport cost

as in this case transport cost and tariff is zero so

p = p*.