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QUESTION 2 The textbook considers the extension of the Ricardian model to more than two goods...

QUESTION 2

The textbook considers the extension of the Ricardian model to more than two goods – let’s consider the case of more than two countries.

Consider a world of FIVE countries: two countries (A, B, C, D and E), that produce clothing and food with one factor of production, labor. Suppose the opportunity cost of clothing with respect to food (aLC/ALF) in each country is the following:

A: 1    B: 2   C: 3   D:4   E:5

Suppose the international relative price of clothing is PC/PF = 3.5. What can you say about the pattern of trade?

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Answer #1

As per the given opportunity costs country A, B and C will be exporting the cloth to country D and E and importing Food from D and E.

The opportunity cost of cloth is very low in country A and B so they will be earning most by exporting cloths and specialize in the production of cloths. Country C, on the other hand, will not benefit much from trade but it can still trade in cloth as its opportunity cost is lower than the relative price in the world.

Country D and E will be importing cloth and exporting food to country A and B and to an extend C (C is mostly neutral or not much trading.)

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