Question

Question 1: Consider the following Ricardian Model with 2 economies:

	Germany	England
Labor Supply	200 workers	200 workers
Wine	1000 units/worker	800 units/worker
Beer	400 units/worker	300 units/worker

(c) Provide the range of the international relative price of wine at which the two countries would trade.

(d) Show graphically that Germany gains from trade. Carefully label your graph.

(e) Which country has higher wages? What determines the real wage at the national level? Explain.

(f) Calculate real wages in France in autarky and free trade? How do real wages change in France after opening to free trade? (Hint: Assume a international relative price of wine that makes sense in this model)

Answer 1

Absolute advantage means county are skil or efficient in producing that product.

1):- Germany produce 400 unit of beer in one hour while France produce 300 unit in one hour and both have same labor force too so Germany has absolute advantage in producing beer.

• both have same labor force

• Germany produce 400 unit in one hour.

• france produce 300 unit in one hour

• both are producing beer

• Germany has absolute advantage over France.

2) :- here we add wine production too . To clear comparison.

•First of all Germany have absolute advantage over France in both production of wine and beer

• beer is 1.33 better than France beer production SO clearly Germany has comptative advantage over France.

• whole in wine again Germany is 1.25 better than France

• but here we are asked for beer SO Germany has comptative advantage over France

• it is 1.33 better than France beer.