Question

hi there - i am currently studying an international trade module and i keep getting confused with the concept of relative price which we see in the ricardian model and other models too. could someone help clarify what the relative prices actually demonstrate? i feel like i kind of understand it then i dont.

Answer 1

Solution:- Before relative price we need to understand absolute price. Absolute price is generally the market price of a good. Example :- A packet of chips costs $5 so the absolute price of chips is $5.

Now, the relative price, it is in general the ratio between the prices of two goods or services .It is the comparison between prices of 2 goods or services. Example:- suppose price of chips packet is $5 and of cookies packet is $20 then relative price of chips to cookies is 5/20 =1:4 which means 1/4 of packets cookies per packet of chips ; relative price of cookies to chips is 20/5 = 4:1 which means 4 packets of chips per packet of cookies.

Relative price is also the opportunity cost it means it shows how much of one good is sacrificed to produce another good.

Hope this was helpful!!