Suppose two economies Home(H) and Foreign(F) produce two goods, breadand wine, with only one production factor: labour. Production technology, expressed as unit labour requirement (), is given in the following table:

	Bread	Wine
Home	6	12
Foreign	4	2

Suppose that Home and Foreign have 2400 and 1800 units of labour respectively. Also assume that both countries are free to trade, and the world relative price of bread is 1.

a. Use the Ricardian Model to explain the pattern of specialisation and trade that is expected between these two countries. Support your written answer with the use of graphs.

b. Use the Ricardian Model to assess the impact of trade on these countries' national welfare. Support your written answer with the use of graphs.

 

c. What are the insights provided by the Ricardian Model regarding the impact of trade on the distribution of income within each of these countries? Briefly explain why?

 

 

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a Pattern of Specialization and Trade In the Ricardian Model countries specialize in the production of goods where they have a comparative advantage i... View the full answer