A Ricardian Example

 

You are given the information shown in the table about production relationships in Vintland and Moonited Republic, using Standard Ricardian assumptions:

 

 

Labor Hours per Bottle of Wine

Labor Hours per Kilogram of Cheese

Vintland

15

10

Moonited Republic

10

4

 

Vintland has 30 million hours of labor in total per year. Moonited Republic has 20 million hours of labor per year.

 

  • Which country has an absolute advantage in wine? In cheese? Why?
  • Which country has a comparative advantage in wine? In cheese? Why?
  • Graph each country's production possibilities frontier. Using community indifference curves, show the pre-trade equilibrium for each country (assuming with no trade, Vintland consumes 1.5 million kilos of cheese and Moonited Republic consumes 3 million kilos of cheese).
  • When trade is opened, which country exports which good? If the equilibrium international price ratio is 1/2 bottle of wine per kilo of cheese, what happens to production in each country?
  • In this free-trade equilibrium, 2 million kilos of cheese and 1 million bottles of wine are traded. What is the consumption point in each country with free trade? Show this graphically using community indifference curves.
  • Does each country gain from trade? Explain, referring to your graphs as is appropriate.