Trade and Technology: The Ricardian Model - Faculty

International Commercial Policy
The Ricardian Model
Trade: Gains from trade (cont.) - example
If the domestic country does not trade, it can use one hour of
labor to produce 1/a LW = 1/2 liter of wine.
If the domestic country does trade, it can use one hour of
labor to produce 1/a LC = 1 kg of cheese, sell this amount to
the foreign country at current prices to obtain 1 liter of wine.
If the foreign country does not trade, it can use one hour of
labor to produce 1/a * LC = 1/6 kg of cheese.
If the foreign country does trade, it can use one hour of labor
to produce 1/a * LW = 1/3 liter of wine, sell this amount to the
domestic country at current prices to obtain 1/3 kg of
cheese.
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