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Trade and Technology: The Ricardian Model - Faculty

Trade and Technology: The Ricardian Model - Faculty

Autarky: PPF (cont.)

Autarky: PPF (cont.) International Commercial Policy The Ricardian Model a LC Q C + a LW Q W = L so that Q C = L/a LC when Q W = 0, Q W = L/a LW when Q C = 0, and Q W = L/a LW – (a LC /a LW )Q C . When the economy uses all of its resources, the opportunity cost of cheese production is the quantity of wine that is given up (reduced) as Q C increases: (a LC / a LW ) When the economy uses all of its resources, the opportunity cost is equal to the absolute value of the slope of the PPF, and it is constant when unit labor requirements are constant. 18


Autarky: PPF (cont.) International Commercial Policy The Ricardian Model To produce an additional kg of cheese requires a LC hours of work. Each hour devoted to cheese production could have been used to produce a certain amount of wine instead, equal to 1 hour/(a LW hours/liter of wine) = (1/a LW ) liter of wine. For example, if 1 hour is moved to cheese production, that additional hour of labor could have produced 1 hour/(2 hours/liter of wine) = 1/2 liter of wine. The trade-off is the increased amount of cheese relative to the decreased amount of wine: aLC /aLW . 19


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