Question

both cloth and wine will be produced more cheaply in Portugal, leaving English labor out of work. Hence an English wage that is more than 90 percent of the Portuguese wage is not compatible with employment in England. At the other extreme, if w is smaller than 80/120, then both cloth and wine will be cheaper if made in England, putting Portuguese labor out of work. Hence we need to be somewhere in between 2/3 and 9/10. (Because Ricardo granted Portugal an absolute advantage in both goods, he doomed English workers to a lower wage in order to be employed.) The idea that a Ricardian equilibrium involves identifying the source that can supply a good at minimum cost is at the heart of taking the model to more goods and countries Any hope of applying this example to actual world trade requires adding more goods and countries. How can we do that? Let's proceed step by step More Goods Let's add another good, linen, while sticking with just our two countries. Say England needs 100 workers to make a unit of linen, and Portugal needs 100 workers as well. These numbers grant England an even stronger comparative advantage in linen than in cloth. We can extend the previous inequality to 100 100 90 100 80 120 (linen (cloth (ine) This ordering of goods in terms of England's relative productivity is called a chain of comparative advantage. Under free trade, the English relative wage w breaks this chain between goods for which England's relative productivity is above or below its relative wage. The goods to the left of the break are produced more cheaply in England and those to the right of the break are produced more cheaply in Portugal. For example, an ω of .95 breaks the chain between linen (produced more cheaply in England) and cloth and wine (cheaper from Portugal). An ω of .9 breaks it at cloth (costing the same from either country, with linen cheaper from England and wine cheaper from Portugal) what determines the relative wage ω that breaks the chain? In general, finding it can be quite complicated but, if the two countries spend their income the same way (specifically, if tastes are identical and homothetic), the problem simplifies. We can then use the chain of comparative advantage to construct the demand curve for English labor relative to world labor (on the x-axis) as it varies with the English wage w (on the y-axis Ifw>1, then English labor has priced itselfout of all goods. Hence, the demand curve is just a vertical line at zero for w above England's relative productivity for good i. At a wage ω-1, England is competitive in linen, and buyers are indifferent between England and Portugal as a source. The demand curve for English labor is then flat (perfectly elastic) between zero and the point at which the demand for linen is saturated at the price of 100. A decline in from this point renders England the sole producer of linen. Since the price of linen is 100w, a drop in w lowers the price

1. As costs and unit work necessity are same in every one of the spots with the end goal that products are created at most minimal costs, nations are profited by profession.

2. As the prerequisite of work in making wine and fabric is lower for Portugal, it has outright favorable position underway of both wine and material.

Opportunity cost of making wine in Britain is (1/100)/(1/120) = 120/100 = 1.2

what's more, open door cost of making wine in Portugal is (1/90)/(1/80) = 80/90 = 0.89

As happenstance cost of making wine is lower for Portugal, it has near preferred standpoint in the generation of wine.

Essentially, opportunity cost of making fabric in Britain is (1/120)/(1/100) = 100/120 = 0.83

what's more, open door cost of making material in Portugal is (1/80)/(1/90) = 90/80 = 1.1

As happenstance cost of making material is lower for Britain, it has near favorable position in the creation of fabric.

3. In the event that w=100/100=1, the two nations won't consent to exchange.

4.If w=90/120 = 0.75, the two nations will consent to exchange.

5. In the event that w=60/120 = 0.5, the two nations won't consent to exchange.

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