QUESTION 1

i.) In the context of the basic Ricardian Model explain what is meant by absolute and comparative advantage. Explain how comparative advantage leads to specialization and the effect specialization (in the existence of comparative advantage) can have on production possibilities (be sure to comment on the shape of the production possibilities curve). (10 points)

ii.) Describe how increased output can result in increased consumption possibilities (explain the consumption possibilities line and the meaning of the slope of the consumption possibilities line). (10 points)

iii.) What determines comparative advantage?Discuss geographical and climactic influences and discuss factor endowment as described in the Heckscher-Ohlin model. (5 points)

QUESTION 2

i) Discuss the degree of "specialization" that is predicted by the basic Ricardian Model and by the Heckscher-Ohlin model. (10 points)

ii) Comment on why the production possibilities curve in the Heckscher-Ohlin model may be more representative of "real world" production choices. (10 points)

iii) What is the essential difference between the Ricardian model and the Heckscher-Ohlin model with respect to underlying assumptions? (5 points)