Question
Interpret with five assumptions of the Ricardian Trade Model and illustrate it with an example how it determines international trade flows. For this question, my
Interpret with five assumptions of the Ricardian Trade Model and illustrate it with an example how it determines international trade flows.
For this question, my answers are of following. Did I miss anything or are any parts wrong?
The simple Ricardian model assumes two countries producing two goods and using one factor of production. The goods are assumed to be identical, or homogeneous, within and across countries. The workers are assumed to be identical in the productive capacities within, but not across, countries.The Ricardian model shows that if we want to maximize total output in the world, then we should. fully employ all resources worldwide, allocate those resources within countries to each country's comparative advantage industries, allow the countries to trade freely thereafter.
Many firms produce output in each industry such that each firm is too small for its output decisions to affect the market price. This implies that when choosing output to maximize profit, each firm takes the price as given or exogenous.
Firms choose output to maximize profit. The rule used by perfectly competitive firms is to choose the output level that equalizes the price (P) with the marginal cost (MC). That is, set P = MC
Output is homogeneous across all firms. This means that goods are identical in all their characteristics such that a consumer would find products from different firms indistinguishable. We could also say that goods from different firms are perfect substitutes for all consumers
There is free entry and exit of firms in response to profits. Positive profit sends a signal to the rest of the economy and new firms enter the industry. Negative profit (losses) leads existing firms to exit, one by one, out of the industry. As a result, in the long run economic profit is driven to zero in the industry
Information is perfect. For example, all firms have the necessary information to maximize profit and to identify the positive profit and negative profit industries
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