Question

Consider another Ricardian example, using standard Ricardian assumptions: Labor Hours per Bottle of Wine Labor Hours per Kilogram of Cheese Vintland Moonited Republic Vintland has 30 million hours of a labor in total per year. Moonited Republic has 20 million hours of labor per year.

Give me these questions answer. needed argent.

Answer 1

Ricardian model is based on the concept of Comparative advantage. If one country can produce a good at lower opportunity cost than the other country then we say the former country has a Comparative advantage in the production of that good.

And country specializes in the production of the good in which it has Comparative advantage and exports that good.

(d) which country will export which good will depend on, in which good it has Comparative advantage. For this let's calculate the opportunity cost of production of each good in each country.

Let's first calculate opportunity cost of production in vintland.

Opportunity cost of producing wine in terms of cheese will be the ratio of labor hours requires to produce 1 bottle of wine to the labor hour required to produce 1kg of cheese.

= 15/10= 1.5 kg of cheese/bottle of wine. That vintland must sacrifice 1.5 kg of cheese to produce 1 bottle of wine.

Similarly opportunity cost of producing cheese in terms of wine.

= 10/15= 2/3 that is to produce 1kg of cheese vintland must sacrifice 2/3 bottles of wine.

Now let's calculating opportunity cost of production in Moonited republic.

Opportunity cost of producing wine in terms of cheese

=10/4 = 5/2= 2.5 that is to produce 1 bottle of wine Moonited republic must sacrifice 2.5 kg of cheese.

Similarly opportunity cost of producing cheese in terms of wine

= 4/10= 2/5 that is Moonited republic must sacrifice 2/5 bottles of wine to produce 1 kg of cheese.

As we can see the opportunity cost of producing wine is lower in vintland compared to Moonited republic and Moonited republic has a lower opportunity for producing cheese compared to vintland.

So vintland will export wine and Moonited republic will export cheese.

If the equilibrium international price ratio is 1/2 bottle of wine for 1 kg of cheese, Moonited Republic will find it profitable to export cheese because their opportunity cost of production is 2/5= 0.4 and the price is 1/2= 0.5 and similarly vintland will find it profitable to produce only wine and trade it for cheese because their opportunity cost of production is higher which is 0.66 and the world price 0.5. So it's better for them to export wine for cheese.

At equilibrium international price of 1/2 bottle of wine for 1kg of cheese Moonited republic will specialize in the production of cheese and vintland will specialize in the production of wine.

(e) the original production possibility frontier of each countries is given and in absence of trade, consumption possibility and production possibility are the same. After the trade is allowed at equilibrium price of 1/2 bottle of wine for 1 of cheese. The consumption possibility of each country shifts outwards in the direction of good which they import.

PPE for Virtland S PAGRI beffles of wire million ---- Need Lonsumption possibility Ulian ke cheese, Imillion wine Cheese in million

The new consumption possibility of vintland is drawn in dotted line and given they export 1 million bottles of cheese, at equilibrium price they'll get 2 million kg of cheese. The consumption point for vintland is given by point A where they consume 1 million bottles of wine and 2 million kg of cheese.

Similarly below I have drawn the production possibility and consumption possibility of Moonited republic.

PPF for moorifed Republit .... New longontsion Possibility wire million of bottle 770 3 1 w Cheese milton of kg

Similarly the new consumption possibility for country Moonited republic is given by dotted line. Moonited republic will export 2 million kg of cheese for exchange of 1 million bottles of wine and this consumption point on their consumption possibility frontier is given by point B. Where they'll consume 3 million kg of cheese and 1 million bottles of wine.

(f) having answered first 2 parts this part is fairly straight forward and easier. We are asked to tell whether the countries gain from trade or not. Just by looking at the consumption possibilities that each country now have you can tell that they have gained from the trade.

The new consumption possibility for each country shifts outwards in the direction of the food they import. Which means while they can always consume what they produce but how with trade they can consume more of the good they import. Which suggest that trade has made one good relatively cheaper for both of them.

So we can say with certainty that both countries gain from the trade at equilibrium price.