Question 1 Ricardian Model of Trade

Suppose two economies Home (H) and Foreign (F) produce two goods, bread and wine, with only one production factor: labour. Production technology, expressed as unit labour requirement (), is given in the following table:

BreadWinehome612foreign42

Suppose that Home and Foreign have 2400 and 1800 units of labour respectively. Also assume that both countries are free to trade, and the world relative price of bread is 1.

a. (2 marks) Use the Ricardian Model to explain the pattern of specialisation and trade that is expected between these two countries. Support your written answer with the use of graphs.

b. (3 marks) Use the Ricardian Model to assess the impact of trade on these countries national welfare. Support your written answer with the use of graphs.

(2 marks) What are the insights provided by the Ricardian Model regarding the impact of trade on the distribution of income within each of these countries? Briefly explain why.

Question 2 Ricardian Model of Trade and Trade Wars

Please check the fragment below extracted from the article Briefing: Trade war, a primer, IPE Magazine, 2019. In this fragment the author states that It is impossible to win a trade war.

(3 marks) Indicate whether you agree or disagree with this statement and use the Ricardian Model to briefly justify your answer.

Briefing: Trade war, a primer

By Peter Kraneveld January 2019 (magazine)

Protectionism is becoming more widespread despite the benefits of free trade being understood for more than two centuries

Key points

Ricardos theory of comparative advantage shows that all countries can benefit from trade

Trade is not a zero-sum game

The US has lost more than it has won from the Trump administrations recent tariffs

On a microeconomic level there will be winners and losers from the increase in tariffs

In 1817, David Ricardos On the Principles of Political Economy and Taxation was published. In this classic text, he showed trade between two countries can be profitable for both nations, even when one country can make all its goods more cheaply. Ricardos theory of comparative advantage has been refined over the past century but it remains widely accepted among economists.

Several conclusions follow from the theory. First, trade is not a zero-sum game. Less trade is a lose-lose proposition for everyone. Therefore, when US President Donald Trump claimed that a trade war is easy to win, he showed that he is badly advised, ignorant to the benefits of trade, or both. It is impossible to win a trade war. ()

Fragment copied on 31/07/2023 from: https://www.ipe.com/briefing-trade-war-a-primer/10028808.articl