International Trade - Theory and Policy, 2010a

taken as fixed parameters whose values are known. They are variables over which the agents within the
model have no control. In the Ricardian model, the parameters (L, aLC, aLW) are exogenous. The
corresponding starred variables are exogenous in the other country.
Endogenous variables are those variables determined when the model is solved. Thus finding the solution to
a model means solving for the values of the endogenous variables. Agents in the model can control or
influence the endogenous variables through their actions. In the Ricardian model, the variables
(LC, LW, QC, QW) are endogenous. Likewise, the corresponding starred variables are endogenous in the
other country.
KEY TAKEAWAYS
The Ricardian model incorporates the standard assumptions of perfect competition.
The simple Ricardian model assumes two countries producing two goods and using one factor of
production.
The goods are assumed to be identical, or homogeneous, within and across countries.
The workers are assumed to be identical in the productive capacities within, but not across, countries.
Workers can move freely and costlessly between industries but cannot move to another country.
EXERCISES
1. Jeopardy Questions. As in the popular television game show, you are given an answer to a
question and you must respond with the question. For example, if the answer is “a tax on
imports,” then the correct question is “What is a tariff?”
1. The type of variable whose value is determined as a part of the solution to the model.
2. The type of variable whose value is determined outside the model and is presumed to be
known by the model participants.
3. The rule used by perfectly competitive firms to determine the profit-maximizing level of
output.
4. What a perfectly competitive firm may do if it experiences substantially negative profit.
5. The kind of equilibrium in a model in which multiple markets satisfy the equality of supply
and demand simultaneously.
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