Consider the Ricardian model of trade described in this chapter. Use Table 16.5 to answer the questions that follow.

Table 16.5

(a) Show that if the relative price of computers to rice were any amount smaller than 2:3, country N would only produce rice. Likewise, show that country N will only produce computers if the relative price of computers to rice were to exceed 2:3.

(b) What accounts for this “knife-edge” behavior? Contrast it with the Heckscher-Ohlin model, where the production of both goods is consistent with a whole range of relative prices [see problem (4)].

(c) Now carefully redo part (a) for country S, showing that the autarkic price of computers to rice must be 2:1. Combining these two exercises, argue that if both goods are consumed once, the economies are opened to trade and the international relative price of computers to rice must lie between 2:3 and 2:1.

Data from problem 4

Understand why the Heckscher-Ohlin model does not lead to complete specialization, in contrast to the Ricardian framework. Take the car-textiles example studied in this chapter. Recall that in our example, each of these goods is produced by capital and labor, but cars use capital more intensively. Now an increase in the relative price of cars will cause more resources to go into car production.

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Labor required In N In S One computer 10 40 One sack of rice 15 20