Question

# hi there - i am currently studying an international trade module and i keep getting confused...

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.

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.