The Ricardian Model

The Ricardian Model

1. What are comparative advantage and opportunity costs? Can China have a comparative advantage in any sector? Why?
2. Define opportunity costs and comparative advantage. China is today the first world exporter; its share on world export is about 13%. It is the leading exporter country in many sectors (textile, footwear,…). Chinese minimum wages are $200 ppp per month (compared to $1,000 in the US, 1,400 in France, $400 in Tunisia). Does this mean that China is going to have a comparative advantage in all trading sectors? Comment your answer.
3. The following table gives the unit labor requirements for the production of tables and chairs .

Unit labor requirements

Assume Labor supply: Italy 100, Mexico 60

1. Draw the production possibility curves for each country.  [Put tables on the vertical axis].
2. For France, what is the opportunity cost for tables? For chairs?
3. For Mexico, what is the opportunity cost for tables? For chairs?
4. Which country has an absolute advantage in the production of chairs?  Explain.
5. Which country has a comparative advantage in the production of tables? Of chairs? Explain.

1. Why do countries whose relative labor productivities differ across industries specialize in the production of different goods when trade between them is allowed? What are the gains from this specialization?

Consider the following unit labor requirements:

If one table can be exchanged for one desk: What is the gain from trade for France? And for Spain?

1. Home has 2,000 units of labor available. It can produce two goods, oranges and pears. The unit labor requirement in orange production is 8, while in pear production is 4.

1. Graph Home’s production possibility frontier;
2. What is the opportunity cost of oranges in terms of pears?
3. What is the opportunity cost of pears in terms of oranges?

Consider now a second country (Foreign) with a labor force of 1,200. Foreign labor requirement in orange production is 12, while in pear production it is 2.

1. Graph Foreign’s production possibility frontier;
2. What is the opportunity cost of oranges in terms of pears?
3. What is the opportunity cost of pears in terms of oranges?

What country is expected to export oranges? Why?

6. Why is China considering to move some production abroad? Has it been a successful strategy until now? Why?

7.  A country engaging in trade according to the principles of comparative advantage gains from trade because it  

A) is producing exports indirectly more efficiently than it could alternatively.  

B) is producing imports indirectly more efficiently than it could domestically.  

C) is producing exports using fewer labor units.  

D) is producing imports indirectly using fewer labor units.  

E) is producing exports while outsourcing services.  

8.

[pic 1]

Given the information in the table above  

A) neither country has a comparative advantage in cloth.  

B) Home has a comparative advantage in cloth.  

C) Foreign has a comparative advantage in cloth.  

D) Home has a comparative advantage in both cloth and widgets.  

E) neither country has a comparative advantage in widgets.  

9) Given the information in the table above, Home's opportunity cost of cloth is:  

A) 0.5  

B) 2.0  

C) 6.0  

D)1.5  

E) 3.0

10) Given the information in the table above, Home's opportunity cost of widgets is:  

A) 0.5  

B) 2.0  

C) 6.0  

D)1.5  

E) 3.0

Chapter 4

1. Using a graph show how the equilibrium price and quantity change in the market for luxury cars when:

1. Income decreases;
2. The price of oil decreases;
3. Economic growth is expected to boost next year;
4. The Government imposes a tax on luxury cars owners;
5. The Government gives incentive to use cheap cars;
6. Controls on driving licenses for elderly people in a ageing population.

Specify what is/are the schedule(s) affected and how they move.

1.  “The price adjustment moves the market towards the equilibrium of supply and demand”. Is this statement true or false? Using a graph show how the markets move towards the equilibrium when the is a surplus; do the same when there is a shortage.

1. The market for pizza has the following demand and supply schedule:

Graph the demand and supply curves. What is the equilibrium price and quantity in this market?

1. Using a graph, show how the equilibrium price and quantity change in the market for wine when:

1. Income increases;
2. The Government engages in TV campaigns on television and Internet warning about the consequences of  wine abuse on health;
3. The Government forbid the consumption of wine for teenagers;
4. The price of grapes increases;
5. A hurricane destroys grapevine plantations;
6. Specify what is/are the schedule(s) affected and how they move.

1. Using a graph, show how the equilibrium price and quantity change in the market for cigarettes when:

1. Income decreases;
2. The Government engages in TV campaigns on television and Internet warning about the consequences of  cigarettes abuse on health;
3. The price of tobacco decreases;
4. The price of cigars decreases;

Specify what is/are the schedule(s) affected and how they move.

GDP

1. The GDP includes

1. the value of all intermediate goods and services.
2. the value of all final goods and services.
3. the value of both intermediate and final goods and services.
4.  the value of all transactions.

1. Define Consumption.  What is the weight of this component in the developed countries’ GDP? Is it lower or higher than in emerging countries?
2. Place each of the transactions in one of the four components of expenditure: C, I, G, NX. (skoda is  a German auto producer)

1. Skoda sells car to the police department.
2. Skoda sells car to taxi company.
3. Skoda sells car to German company.
4. Skoda sells car to Jan Novak.
5. Skoda builds car to be sold next year (e.g. low demand due to crisis.)

1. What component of GDP (if any) would each of the following transactions affect:

1. a purchase of house by households;
2. inventories;
3. salaries of doctors working in a public hospital;
4. R&D investment;
5. restaurant meals;
6. purchases of machinery and  equipment by firms;
7. a domestic resident firm increases production abroad.

1. Double counting can be avoided by

1. including the value of intermediate goods in the current year.
2. not counting the value of intermediate goods in GDP.
3. including the value of intermediate goods in the production year but not in the selling year of those goods.

6) In the US the single largest expenditure component in GDP is

1. government spending.
2. investment.
3. consumption.
4. net exports.

7) In China the single largest expenditure component in GDP is

1. government spending.
2. investment.
3. consumption.
4. net exports.

8) By how much does GDP rise in each of the following scenarios? Explain

a) you spend $5,000 on college tuition this semester;

b) you buy a used car from a friend for $2,500;