Question

Ricardian model: Export supply curve

Consider Thailand and Germany. Thailand exports electronics and imports cars. The Thai population is 100 and each worker can produce one electronic good. Thai consumers have the following Cobb-Douglas preferences: U= Q_C^1/2Q_E^1/2. Moreover, we assume that the relative price of electronics is 1 in Autarky.

a) What is the production of electronics when the relative price is larger than 1?

b) What is the production of electronics when the relative price is smaller than 1?

c) What is the export supply curve for Thai electronics?

Answer 1

There are 100 people so the maximum Thailand can produce is 100 electronic goods. If the relative price in world market is greater than 1, then Thailand will produce 100 electronic goods. If the relative price is less than 1, there will be no production of electronic goods because the country is better off in producing cars and remain in autarky. As long as relative price is 1, Thailand will continue to produce till the limits are reached at 100 electronic goods.

a) What is the production of electronics when the relative price is larger than 1?

100 units

b) What is the production of electronics when the relative price is smaller than 1?

0 units

c) What is the export supply curve for Thai electronics?

The XS curve has an equation

0 < QE/QC (relative production of electronics goods) < 100 when PE/PC = 1

QE/QC = 0 when PE/PC < 1

QE/QC = 100 when PE/PC > 1