Trade and Technology: The Ricardian Model - Faculty
Trade and Technology: The Ricardian Model - Faculty
Trade and Technology: The Ricardian Model - Faculty
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<strong>Trade</strong>: Equilibrium prices<br />
International Commercial Policy<br />
<strong>The</strong> <strong>Ricardian</strong> <strong>Model</strong><br />
Remember that under autarky a country’s relative prices<br />
reflect its opportunity cost. In particular, P C /P W = a LC /<br />
a LW <strong>and</strong> P* C /P* W = a* LC /a* LW .<br />
Remember also that we assumed that Home has a<br />
comparative advantage in cheese production which<br />
implies that a LC /a LW < a* LC /a* LW .<br />
Hence, under autarky it must be that P C /P W < P* C /P* W<br />
so that cheese is relatively cheaper at Home.<br />
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