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Trade and Technology: The Ricardian Model - Faculty

Trade and Technology: The Ricardian Model - Faculty

Trade:

Trade: Relative wages (cont.) 52
 International Commercial Policy The Ricardian Model

Trade: Gains from trade International Commercial Policy The Ricardian Model Consider two alternative ways of using an hour of labor: 1. Home could either produce 1/a LW liter of wine directly. 2. Or Home could produce 1/a LC kg of cheese and trade it for (1/a LC)(P C /P W) liter of wine since 1 kg of cheese can be exchanged for P C /P W liter of wine in the world market. The second way will produce more wine than the first way as long as 1/a LW < (1/a LC)(P C /P W) � P C /P W > a LC/ a LW, which is true from the RD/RS diagram. 53


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