Question

1. a. List the key assumptions of Ricardian comparative advantage.

b. Given the output per labor coefficients for each country below (Q/L),

Which country has absolute advantage? ____________________

c. Which country has comparative advantage in Software __________

In Fuel Cells _______________

Product	india (Q/L)	China (Q/L)
Software	4	5
Fuel Cells	2	3

d. Complete the table below with opportunity cost of each product in each country:

Prodcut	India	China
Software
Feuls

e. Graph the production possibilities frontier in each country.

f. At what price ratio (RoW) can both countries gain from trade?

g. Illustrate the gains from trade.

h. Given a wage = $1.00 in China and wage = $.65 in India, could both countries compete in Fuel Cells? Explain and calculate unit labor costs in both countries in the fuel cell industry.

Answer 1

1.

a. Key Assumptions of Ricardian Comparative Advantage

• There are only two countries.
• Both countries produce the same two commodities.
• Labor is the only factor of production in both countries and is fully employed in both countries.
• Labor supply is unchanged.
• All units of labor are homogenous.
• The factor of production (labor) is perfectly mobile within each country but immmobile between the two countries.
• Technological know-how does not change in both countries.
• There are no trade barriers and restrictions between two countries.
• There is no transportation cost incurred during the trade between two countries.
• Production of commodities follow constant returns.
• Both countries have similar taste.