EC $433$ International Economics

$//22$ Dr$.$ Meister

Review for Ch$.4$

$1.$ Consider the following $$monetized$$ Ricardian model of international trade. Let

w $=$ wage rate, L$/$unit $=$ the amount of labor time required to make $1$ unit of the good in

question, PC $=$ price of cloth, PWn $=$ price of wine, $=$ British pound, esc $=$ escudo $($old

Portuguese currency$).$ Assume that the exchange rate is $.$ Let E $=$ England and

Pt $=$ Portugal.

Country w$/$hr L$/$unit PC L$/$unit PWn

$(1)$ England $1$ hr$.1$ hrs$.3$

$(2)$ Portugal $0\mathrm{.}7$ esc hrs$.1\mathrm{.}4$ esc hrs$.2\mathrm{.}8$ esc

a$.$ Which country has the comparative advantage in Cloth? Explain how you

figured this out.

b$.$ Give the range in which the exchange rate can $$lie$$ and still have trade

according to comparative advantage.

c$.$ Go back to the exchange rate of $.$ What range can w Pt lie and still have

trade according to comparative advantage?

d$.$ Stay with the exchange rate of $.$ What range can wE lie and still have

trade according to comparative advantage?

e$.$ If the exchange rate fell to $,$ which country would tend to $$lose its

advantage?$$ Explain intuitively.

e $=1$esc

$1$

aC

E $=1$ aWn

E $=3$

aC

Pt $=2$ aWn

Pt $=4$

e $=1$esc

$1$

e $=1$esc

$1$

e $=0\mathrm{.}6$esc

$1$