Question
1.Analyze - with great deal of care, precision, and detail - the Ricardian model of trade. Assume a hypothetical world economy composed of two states,
1.Analyze - with great deal of care, precision, and detail - the Ricardian model of trade. Assume a hypothetical world economy composed of two states, Portugal and England. Each produces only two goods, wine and cloth. Assume also that the only factor of production is labor and that this factor is mobile. Finally, assume the following unit labor requirements (ULRs): in Portugal, the ULR for wine is 1 and the ULR for cloth is 5. In England, the ULR for wine is 3 and the ULR for cloth is 7.
Please address - at a minimum - the following questions:
(a) what is unit labor requirement?
(b) What is absolute advantage and which state - if any - has it?
(c) How does absolute advantage feature in our analysis of the benefits of trade?
(d) How is comparative advantage derived?
(e) What is opportunity cost?
(f) How do we calculate opportunity cost arithmetically in the present hypothetical scenario involving England and Portugal?
(g) Which country has comparative advantage in which product?
(h) How does Portugal derive exchange benefits by trading with England?
(i) How does England derive exchange benefits by trading with Portugal?
(j) How does the world economy as a whole benefit from specialization?
(k) If we adopt a more realistic assumption that labor is not mobile, what will happen to those workers who are employed in an industry in which their state does not have comparative advantage?
(l) How can we make those workers whole?
(m) Finally, how does any of this go to the idea of obviating war? Explain your answers carefully.
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