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Trade and Technology: The Ricardian Model - Faculty

Trade and Technology: The Ricardian Model - Faculty

Trade:

Trade: Equilibrium prices (cont.) International Commercial Policy The Ricardian Model Here, the relative supply curve depicts how the world supply of cheese relative to wine varies with the world price of cheese relative to of wine. Recall that Home workers work in cheese production if an only if P C /P W > a LC /a LW since this implies that the cheese sector offers higher wages. Recall also that Foreign workers work in cheese production if an only if P* C /P* W > a* LC /a* LW since this implies that the cheese sector offers higher wages. 32


Trade: Equilibrium prices (cont.) International Commercial Policy The Ricardian Model Given that we assumed that Home has a comparative advantage in cheese production, a LC /a LW < a* LC /a* LW , and P C /P W = P* C /P* W under free trade, we therefore get the following relationship: � If P C /P W < a LC /a LW, no country produces cheese so that the relative supply of cheese is zero. � If a LC /a LW < P C /P W < a* LC/a* LW, Home produces only cheese and Foreign produces only wine so that the relative supply of cheese is (L/a LC )/(L*/a* LW ). � If a* LC /a* LW < P C /P W , no country produces wine so that the relative supply of cheese is infinity. 33


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