International Trade
Problem Set #1
Due: Friday, July 13
Consider a Ricardian model with two goods, cheese C and wine W. The unit labor input
requirements are: aLC = 6, aLW = 4, a*LC = 4, a*LW = 2 (an asterisk denotes a foreign
variable). The supply of labor in each country is 20. Assume throughout that the price of
good W in each country is equal to 1.
Questions:
1) Which country has comparative advantage and absolute advantage in which
goods?
2) Draw and label the world relative supply curve.
3) Find the values of Pc, P*c, w, and w* in the autarky equilibrium.
4) Find the values of Pc, Qc, Q*c, Qw, Q*w, w, and w* in the free trade equilibrium,
for each of the following two world relative demand curves:
a. RDa = 2 – Pc/Pw
b. RDb = 1/2 – (1/4) Pc/Pw
5) Now let’s add another good to the model, sausages, S. The unit labor input
requirements for sausages: aLS = 8, and a*LS = 2. Suppose also that the equilibrium
wage ratio is, w/w* = 1/3. Which good(s) does the home country export in free
trade? How would your answer change if the equilibrium wage ratio were, w/w*
= 2/3?
“The Outsourcing Controversy” Questions:
Does the evidence from India and China defy the Ricardian model? Explain.
Why don’t Indian call centers pay U.S. wages even though they are almost as efficient as
those in the US?
(Each answer should take one sentence.)