Econ - International Economics Problem Set 01B

1. What determines the pattern of international trade in the Ricardian model?
2. Using the Ricardian model, explain why American workers receive higher wages in the production of automobiles than Chinese workers.
3. Explain why countries gain from trade in the Ricardian model.
4. What are a country’s terms of trade and what do improvements in the terms of trade mean?
5. Why is the production possibilities frontier a straight line in the Ricardian model?

Problem Solving
1. Refer to the following table and assume that the total labor supply in Taiwan is 4 and the total
labor supply in Vietnam is 8.

Taiwan

Vietnam

Absolute
Advantage

Number of telephones produced per hour

10

5

?

Number of radios produced per hour

50

10

?

?

?

Comparative advantage

(a) What is the opportunity cost of 1 unit of telephones in terms of radios in Taiwan? In Vietnam?
(b) Determine whether each of the following statements is true or false. Provide a brief explanation of why it is true or false.
i. Taiwan has an absolute advantage in the production of both telephones and radios.
ii. Vietnam has a comparative advantage in the production of telephones.
iii. One possible production combination for Vietnam is 40 units of telephone and 80 units of radio per hour.
(c) If the two countries engage in international trade, what will Taiwan produce and how many?

PS 01B (Ricardian Model)—Page 1 of 2

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Econ-4040-001 14SS
International Economics
Problem Set 01B (Ricardian Model)

(d) What is the real wage in Taiwan in terms of radio? What is the real wage in Vietnam in
terms of telephone?

2. Some Americans fear that as countries such as China and India become more productive in
industries such as computer and computer programming, once dominated by the United States,
the wages of workers in the United States will fall. Should U. S. workers fear foreign competition? Use the table below to briefly explain why or why not. Assume that the initial world
relative price of computer programs is 8, then falls to 4.

Text Problems
1. #2
2. #3
3. #4
4. #5
5. #9a
6. #10a

PS 01B (Ricardian Model)
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(e) Will Taiwan and Vietnam trade if the international relative price of telephone is 3? Briefly
explain why or why not.