Question

Explain why each of the following statements is true, false, or uncertain. You are expected to use graphs, math, and/or specific examples to support your arguments. a. In the Ricardian model, if Home is much larger than Foreigh, it is possible that only Foreign experiences gains from the opening of trade between the two countries. b. If two countries have exactly the same increasing-cost PPFs, mutually beneficial trade is possible as long as residents in the two countries have different tastes and preferences.

Answer 1

Answering True or False with explanation for the below two questions:

a. In the Ricardian model, if Home is much larger than Foreigh, it is possible that only Foreign experiences gains from the opening of trade between the two countries. - Answer is False.

Reason - The Ricardian model uses only a single factor - labor workforce productivity to explain difference in international trade. Using labor constant return to scale techonology that differ across goods and countries Ricardian model try to identify, which country can produce which good/service so that international trade is possible. For example, if 20 labors are required to produce car in Germany and 30 labors are required to produce same car in USA, while 10 labors are required to produce mobile in Germany while only 5 labors are required to produce same mobile in USA, then Germany has Absoulte Advantage in producing car and USA has Absolute advantage in producing mobile. Hence these two contries can trade these two produces.

In this model, the size of the country is not a factor of production and only labor is the factor of production. Hence the statement is false.

b. If two countries have exactly the same increasing-cost PPFs, mutually beneficial trade is possible as long as residents in the two countries have different tastes and preferences. - Answer is True.

Reason - Production Possiblity Frontier (PPF) is the curve, which shows various amounts of two products that can be produced when both are dependent on same finite resource. Any point above the PPF curve is called as opportunity cost. The PPF curve looks like below:

In the above example, to reach point D, the production of mobile has to be increased from point C and production of Car has to be decreased. This is the increasing cost of PPF or the opportunity cost. If two contries have same increasing cost of PPF then its not beneficial for either country to do the trade unless there is difference in taste or preference. For example, if country A has less preference for cars as it is cost expensive and more preference for mobile phone as it is very useful gadget, then there can be mutual benefial trade between cars and mobiles.