International Economics
Dr. Nguyen Binh Duong
Problem Set 1 – Basic Ricardian Model
Consider a Ricardian Model, there are two countries, US and Mexico. Each country can
produce two goods, shirt (S) and food (F). Suppose the US has 500 workers and Mexico has
1000 workers. Labor Productivity (1 individual/1h) in each country is:
Labor Productivity US Mexico
Shirts 4 2
Food 8 1
1. Which country has absolute advantage in Food, in Shirts? Explain?
U.S has absolute advantage in Food and Shirt.
2. In which good does the US have comparative advantage? And Mexico?
Relative Productivity of U.S: S/F = 4/8 = 1/2.
Relative Productivity of Mexico: S/F = 2.
U.S has comparative advantage in Food.
Mexico has comparative advantage in Shirt.
3. Derive and sketch the PPF for each country
Assume that, prior to trade, the US produces 1000 Shirts and 2000 units of food; Mexico
produces 1000 Shirts and 500 units of Food. After trade, show how to increase the total
world output, and thus to increase the benefits of each country.
4. Determine the relative price of each good in terms of subsistence in each country.
5. In free trade, determine the trade pattern between the two countries, how trade affects
the relative prices of food in each country.
6. Suppose that the world demand curve for Food is: Qd = 5000 - 1000. (PF/Ps)
Find the equilibrium world relative price of food under free trade.
