Question

Chapter4 just introduced what is Dornbusch-Fischer-Samuelson mode, no other information.

Explain the effect of an increase in country 2's productivity on the pattern of trade, relative wages, and real income in each country using the Dornbusch-Fischer-Samuelson model (appendix to chapter 4). A good answer will be a carefully written explanation supplemented by graphs. In a five country-two commodity Classical model of trade, where the autarky price ratios in all five countries are different, can you conclude a priori that all five countries will desire to trade? Why or why not? Between which of the five countries is trade certain? What will determine which of the remaining countries will trade? Hint: See pp. 50-51 Is it possible for trade to take place in the Classical model of trade without complete specialization of production in both countries? If so, when? Who will receive the gains from trade in this instance? Why? Given the following Ricardo-type table shows the labor input required per unit of output in each of the two industries in each of the two countries: 1. 2. 3. 4. Shirts Brand 4 days 6 days 12 days 12 days United States France What is the autarkic price ratio in both countries? Which country has comparative advantage in which product? What are the possible terms of trade at which the U.S. and France would choose to trade?

Answer 1

The comparative advantage theory is developed by David Riccardo. Comparative advantage means each country will gain from trade if each of them are producing a commodity with less cost and less time when compared to another country. This is a two country commodity model, united states & frace, producing 2 goods shirts & brands: Here in case of shirt & brandy, united states has comparative advantage when compared to france.