Read the Wikipedia entry for "Comparative Advantage," https://en.wikipedia.org/wiki/Comparative_advantage(you can stop at "Haberler's Opportunity Cost Formulation.")Note that Wikipedia is not always the best site online for information, but for our work I may use it to avoid otherwise unfairly using the intellectual property of authors/material posted online.

Consider carefully the model presented that Ricardo first proposed for England and Portugal and answer the following questions.

(1) Explain, using specific numbers and arguments, why Portugal should be considered the "more efficient country."

(2) Use the method of determining comparative advantage to decide the direction of comparative advantage for these two countries, i.e. use our notation for "unit labor requirements,"which you can interpret here as one hourand decide which country has a comparative advantage in each good.

(3)Using the graph on the right side of the page showing the countries ppf's (with Portugal shown in Red and England shown in Blue), solve for the size of the labor force for Portugal and England assumed in this example.

For ease of computation you can assume each worker works 10 hours.According to the article, it takes 100 hours in England to produce a unit of cloth = it takes 10 workers to produce a unit of cloth.

(4)One powerful outcome of this model is that Ricardo shows that, with specialization (which implies a more efficient use of resources), trade can increase total global output.Using the graph on the right of the page explain clearly what this graph shows about the total output of Cloth and Wine if the countries DO NOT trade versus if THEY DO.(Note that you are given specific points which represent the no trade production for each country and then with trade you can assume the countries totally specialize.)

(5)Consider the quote given at the bottom of this Wikipedia entry:

Gregory Mankiw, chairman of the Harvard Economics Department, has stated: Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.

Can we show this for living standards with the Ricardian model?Let's try ...

Given your information from (3) and (4) compute the total income for PORT and ENGL with free trade.Assume P_C = P_W = $10.

ENGL_______________________

PORT_______________________

So, since Portugal earns approximately 55% of the global income, let us assume that Portugal consumes approximately 55%[1] of the global output in each good which means:

Portugal consumes: 0.55*45 W=_______________ (units of) Wine, and

: 0.55*36 C=_______________(units of)Cloth.