Question

Consider the following Ricardian model.

MPL                           Labor Supply

Pens           Pencils

       France         1/10              1/15                     90

       Germany     1/12              1/20                     120

Answer the following questions and show your steps. For the T/F questions, please explain why they are T/F.

7. Going from closed-economy to free trade, pencil-producing workers in France achieve higher standards of living, but pen-producing workers do not.

8. Under free trade, the pen output of the entire world equals 10 units.

9. If Germany consumes 7 pens under free trade, then France consumes 3 pens.

10. If Germany consumes 7 pens under free trade, then France imports 3 pens.

Answer 1

Ricardian model MPL Pens 1/10 1/12 Labor Suppl Pencils 1/15 1/20 90 120 France German For comparative advantage calculate the opportunity cost Opportunity Pens 0.66 0.6 Pencils France German 1.66 Since, the opportunity cost of producing Pens has lower in Germany. Thus, Germany has comparative advantage Since, the opportunity cost of producing Pencils has lower in France. Thus, France has comparative advantage 7) In Free trade France will specialize in pencils, thus produces more pencil and fewer (or No) pens. Thus, pencil-producing workers in France achieve higher standards of living, but pen-producing workers do not. Hence, the given statement is True 8) The opportunity cost of producing Pens has lower in Germany. Thus, Germany has comparative advantage in producing Pens The marginal productivity of labor is 1/15 of producing pens, marginal productivity of labor is 1/20 of producing pencils and the labor supply is 120 Thus, Germany will produce 10pens Hence, the given statement is True that Under free trade, the pen output of the entire world 120 12 equals 10 units

9) Under free trade countries produce those good in which they have the comparative advantage. Germany has a comparative advantage in pens thus, it will produce pens and imports pencils from France. Similarly, France has comparative advantage in pencils, it will produce pencils and import pens from Germany. Germany is producing 10pens. Thus, if Germany consumes 7 pens, it can export 3 pens to France. Thus, France will consume 3 pens under free trade. Hence, the given statement is True. 10) Germany is producing 10pens. Thus, if Germany consumes 7 pens, it can export 3 pens to France. Thus, France will import 3 pens under free trade Hence, the given statement is True.