Question

Ricardian Model: Import Demand Curve

Consider Thailand and Germany. Germany imports electronics and exports cars. The German population is 200 and each worker can produce either one car or one electronic good. German consumers have the following Cobb Douglas preferences: U=Qc^1/2 Qe^1/2. Let’s focus on cases where the relative price or electronics is lower than in autarky in Germany.

A) what is the relative price of electronics in autarky in Germany?

B) what is total income of consumers in Germany, depending on the price of cars?

C) what is the consumption of electronics in Germany, depending on the relative price of pe/pc?

D) What is the German import demand curve for electronics?

3) Ricardian model: doubling productivity

In the Ricardian model, suppose that MPL is multiplied by two in both industries in the Foreign country (productivity increase).

a) Illustrate what happens to the PPF. Does the slope change?

b) How does the productivity increase affect relative prices in Autarky?

c) Assume that the Foreign economy specializes in one industry, and suppose that the relative price remains the same before and after the productivity increase. How does the change in productivity affect the budget line? How does it affect the slope?

d) Combining, b) and c), by how much does the import demand curve for Foreign shifts upward or leftward?

Answer 1