Consider another Ricardian example, using standard Ricardian assumptions:

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QUESTION:

Consider another Ricardian example, using standard Ricardian assumptions:

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Vintland has 30 million hours of labor in total per year. Moonited Republic has 20 million hours of labor per year.

a. Which country has an absolute advantage in wine? In cheese?

b. Which country has a comparative advantage in wine? In cheese?

c. Graph each country’s production-possibility curve. Show the no-trade production point for each country, assuming that with no trade Vintland consumes 1.5 million kilos of cheese and the Moonited Republic consumes 3 million kilos of cheese.

d. When trade is opened, which country exports which good? If the equilibrium international price ratio is 1/2 bottle of wine per kilo of cheese, what happens to production in each country?

e. In this free-trade equilibrium, 2 million kilos of cheese and 1 million bottles of wine are traded. What is the consumption point in each country with free trade? Show this graphically?

f. Does each country gain from trade? Explain, referring to your graphs as is appropriate?


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