Feenstra 2e Ch02
Feenstra 2e Ch02
Feenstra 2e Ch02
2
1 Reasons for Trade
2 Ricardian Model
Chapter 2: Trade and Technology: The Ricardian Model
3 Determining the
Pattern of
International Trade
4 Solving for
International Prices
Prepared by:
Fernando Quijano
Dickinson State University
Copyright 2011 Worth Publishers International Economics Feenstra/Taylor, 2/e. 1 of 62
Introduction
Absolute Advantage
When a country has the best technology for producing a
good, it has an absolute advantage in the production of
that good.
Comparative Advantage
Absolute advantage is not a good explanation for trade
Chapter 2: Trade and Technology: The Ricardian Model
Home Foreign
Wheat (W) 4 1
Cloth (C) 2 1
International Economics
Copyright 2011 Worth Publishers International Economics Feenstra/Taylor, 2/e. 7 of 62
2 Ricardian Model
Comparative Advantage
Chapter 2: Trade and Technology: The Ricardian Model
Foreign
Equilibrium with No
Trade The highest
Chapter 2: Trade and Technology: The Ricardian Model
level of Foreign
utility on the PPF is
obtained at point
A*, which is the no-
trade equilibrium.
We can now take this price and see how trade changes
production and consumption in each country.
The world price line shows the range of consumption
possibilities that a country can achieve by specializing in
one good and engaging in international trade.
occur at point B.
Through international
trade, Home is able to
export each bushel of
wheat it produces in
exchange for 2/3 yard
of cloth.
As wheat is exported,
Home moves up the
world price line BC.
Chapter 2: Trade and Technology: The Ricardian Model
Home consumption
occurs at point C, at
the tangent
intersection with
indifference curve U2,
since this is the
highest possible
utility curve on the
world price line.
Foreign consumption
occurs at point C*, and
total exports are 40
yards of cloth in
Chapter 2: Trade and Technology: The Ricardian Model
Home Export Supply Panel (a) repeats Figure 2-5 showing the trade
equilibrium for Home with production at point B and consumption at
point C.
Panel (b) shows the Home export supply of wheat.
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4 Solving for International Prices
Home Export Supply Curve
FIGURE 2-9 (2 of 2)
Chapter 2: Trade and Technology: The Ricardian Model
Home Export Supply (continued) For relative prices above 1/2, Home
exports more than 50 bushels, along the segment B C. For example, at
the relative price of 2/3, Home exports 60 bushels of wheat.