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1. At the beginning of the chapter there is a brief quotation from David Ricardo; here
is a longer version of what Ricardo wrote:
England may be so circumstanced, that to produce the cloth may require the labour of 100 men
for one year; and if she attempted to make the wine, it might require the labour of 120 men for
the same time. . . .To produce the wine in Portugal, might require only the labour of
80 men for one year, and to produce the cloth in the same country, might require the labour
of 90 men for the same time. It would therefore be advantageous for her to export wine in
exchange for cloth. This exchange might even take place, notwithstanding that the
commodity imported by Portugal could be produced there with less labour than in England.
Suppose that the amount of labor he describes can produce 1,000 yards of cloth or
1,000 bottles of wine in either country. Then answer the following:
a. What is England’s marginal product of labor in cloth and in wine, and what is
Portugal’s marginal product of labor in cloth and in wine? Which country has
absolute advantage in cloth and in wine, and why?
Answer: In England, 100 men produce 1,000 yards of cloth, so MPLC 5
1,000/100 5 10. 120 men produce 1,000 bottles of wine, so MPLW 5 1,000/120
5 8.3. In Portugal, 90 men produce 1,000 yards of cloth, so MPL* C 5 1,000/90

5 11.1. 80 men produce 1,000 bottles of wine, so MPL*W 5 1,000/80 5 12.5.

So Portugal has an absolute advantage in both cloth and wine, because it has
higher marginal products of labor in both industries than does England.
b. Use the formula PW/PC 5 MPLC/MPLW to compute the no-trade relative price
of wine in each country. Which country has comparative advantage in wine, and
why?
Answer: For England, PW/PC 5 MPLC/MPLW 5 10/8.3 5 1.2, which is the no-
trade relative price of wine (equal to the opportunity cost of producing wine).
So the opportunity cost of wine in terms of cloth is 1.2, meaning that to

S-7
S-8 SOLUTIONS ◼ SOLUTIONS
CHAPTER 2 TRADE CHAPTER
◼ AND 2 TRADE
TECHNOLOGY: AND TECHNOLOGY:
THE RICARDIAN MODEL THE RICARDIAN MODEL S-8

produce 1 bottle of wine in England, the country gives up 1.2 yards of cloth. For
Portugal, P* /P* = MPL* /MPL* 5 11.1/12.5 5 0.9, which is the no-trade
W C C W
relative price of wine (equal to the opportunity cost of producing wine). The no-
trade relative price of wine is lower in Portugal, so Portugal has comparative
advantage in wine, and England has comparative advantage in cloth. Portugal has
comparative advantage in producing wine because it has lower opportunity cost
(P*W/P*C = 0.9) than England in the production of wine (PW/PC = 1.2).
2. Suppose that each worker in the Home country can produce three cars or two TVs.
Assume that Home has four workers.
a. Graph the production possibilities frontier for the Home country.
Answer: See the following figure.
TV, QTV
(units)

Slope 5 ] (MPLTV /MPLC )

5 ]2/3

MPLTV · L
58
DQC 51

DQC 5 ]2/3

MPLC · L 5 12 Car, QC (units)

b. What is the no-trade relative price of cars at Home?

Answer: The no-trade relative price of cars at Home is PC/PTV 5 2/3 =
MPLTV/MPC. It is the slope of the PPF curve for Home.
3. Suppose that each worker in the Foreign country can produce two cars or three
TVs. Assume that Foreign also has four workers.
a. Graph the production possibilities frontier for the Foreign country.
Answer: See following figure.
TV, Q*
TV
(units)

MPL*TV · L*
5 12
Slope 5 ] (MPL* /MPL* ) 5 ]3/2
TV C

MPL* · L* 58 Cars, Q * (units)

C C
S-9 SOLUTIONS ◼ SOLUTIONS
CHAPTER 2 TRADE CHAPTER
◼ AND 2 TRADE
TECHNOLOGY: AND TECHNOLOGY:
THE RICARDIAN MODEL THE RICARDIAN MODEL S-9

b. What is the no-trade relative price of cars in Foreign?

Answer: The no-trade relative price of cars in Foreign is P* /P* = 3/2 =
C TV
MPLTV/MPL*C, or the slope of the PPF curve for the Foreign country.
c. Using the information provided in Problem 2 regarding Home, in which good
does Foreign have a comparative advantage and why?
Answer: Foreign has a comparative advantage in producing televisions because it
has a lower opportunity cost than Home in the production of televisions.
4. Suppose that in the absence of trade, Home consumes nine cars and two TVs and
Foreign consumes two cars and nine TVs. Add the indifference curve for each
country to the figures in Problems 2 and 3. Label the production possibilities fron-
tier (PPF), indifference curve (U1), and the no-trade equilibrium consumption and
production for each country.
Answer: See following figures.

TV, QTV
(units)

Slope 5 ]2/3

8 U1

PPF A
2

9 12 Car, QC (units)
Home

TV, QTV
(units)

12
A*
9
U*
1

Slope 5 ]3/2
PPF*

2 8 Car, Q* (units)
C

Foreign
5. Now suppose the world relative price of cars is PC/PTV 5 1.
a. In what good will each country specialize? Briefly explain why.
Answer: Home would specialize in cars, export cars, and import televisions,
whereas the Foreign country would specialize in televisions, export televisions,
and import cars. The reason is because Home has a comparative advantage in
S-10 SOLUTIONS ◼ SOLUTIONS
CHAPTER 2 TRADE
◼ CHAPTER
AND 2 TRADE
TECHNOLOGY: THEAND TECHNOLOGY:
RICARDIAN MODEL THE RICARDIAN MODEL S-10

cars and Foreign has a comparative advantage in televisions. The relative price
of a car in home is (PC/PTV = 2/3), which is lower than the world price of 1. So
Home will export cars and earn a profit. The world relative price of a television
is 1, higher than that in Foreign (P* TV/P*C = 2/3). So Foreign will specialize in

producing televisions, and export televisions to the world market.

b. Graph the new world price line for each country in the figures in Problem 4
and add a new indifference curve (U2) for each country in the trade
equilibrium. Answer: See the following figures.
TV, QTV
(units)

Slope 5 ]1

4 C
Import

2 U
2
A
B
89 12 Car, QC (units)
Export
Home
TV, Q*
TV
(units)

12 B*
Export

C*
9
8 U*
2
A* Slope 5 ]1

2 4 8 Cars, Q * (units)
C

Import
Foreign

c. Label the exports and imports for each country. How does the amount of
Home exports compare with Foreign imports?
Answer: See graph in part (b). The amount of Home car exports is equal to
the amount of Foreign car imports. In addition, Home imports of televisions
equal Foreign exports of televisions. This is balanced trade, which is an essential
feature of the Ricardian model.
d. Does each country gain from trade? Briefly explain why or why not.
Answer: Both Home and Foreign benefit from trade relative to their no-trade
consumption because they are able to consume at higher indifference curves.
S-11 SOLUTIONS ◼ SOLUTIONS
CHAPTER 2 TRADE
◼ CHAPTER
AND 2 TRADE
TECHNOLOGY: THEAND TECHNOLOGY:
RICARDIAN MODEL THE RICARDIAN MODEL S-11

6. Answer the following question using the information given by the accompanying
table.
Home Country Foreign Country Absolute Advantage

Number of bicycles 4 2 Home/Foreign ratio

produced per hour 2

Number of snowboards 6 8 Home/Foreign ratio

produced per hour 3/4
Comparative advantage MPL S 5 3 MPL*S =4
} }} }
*

MPLB 2 MPLB

a. Complete the previous table in the same manner as Table 2-2.

Answer: See previous table.
b. Which country has an absolute advantage in the production of bicycles?
Which country has an absolute advantage in the production of snowboards?
Answer: Home has an absolute advantage in the production of bicycles
because it is able to produce more bicycles in an hour than Foreign.
[Link] is the opportunity cost of bicycles in terms of snowboards at Home?
What is the opportunity cost of bicycles in terms of snowboards in Foreign?
Answer: Foreign has an absolute advantage in the production of snowboards
because it is able to produce more snowboards in an hour than Home.
d. Which product will Home export, and which product does Foreign export?
Briefly explain why.
Answer: The opportunity cost of one bicycle is 3/2 snowboards at Home (PB/
PS = MPLS/MPLB = 6/4 = 3/2). The opportunity cost of one bicycle is 8/2
snowboards in the foreign country (P* B/P* S = MPL*S/MPL*B = 8/2 = 4). Home
has a smaller opportunity cost producing bicycles than the Foreign.
7. Assume that Home and Foreign produce two goods, TVs and cars, and use the fol-
lowing information to answer the questions:

In the no-trade equilibrium:

Home Country Foreign Country

WageTV 5 12 WageC 5 ? Wage*TV 5 ? Wage*C 5 6

MPLTV 5 2 MPLC 5 ? MPL* TV 5 ? MPL*C 5 1
PTV 5? PC 54 P*TV 53 P*C 5?

a. What is the marginal product of labor for TVs and cars in the Home country?
What is the no-trade relative price of TVs at Home?
Answer: MPLC 5 3, MPLTV 5 2, and PTV/PC 5 MPLC/MPLTV 5 3/2
b. What is the marginal product of labor for TVs and cars in the Foreign
country? What is the no-trade relative price of TVs in Foreign?
Answer: MPL* 5 1, MPL* 5 2, and P * /P * 5 MPL* /MPL* 5 1/2
C TV TV C C TV

c. Suppose the world relative price of TVs in the trade equilibrium is PTV/PC 5 1.
Which good will each country export? Briefly explain why.
Answer: Home will export cars and Foreign will export televisions because
Home has a comparative advantage in cars whereas Foreign has a comparative
advantage in televisions. Each country will specialize in the goods with lower
S-12 SOLUTIONS ◼ SOLUTIONS
CHAPTER 2 TRADE
◼ CHAPTER
AND 2 TRADE
TECHNOLOGY: THEAND TECHNOLOGY:
RICARDIAN MODEL THE RICARDIAN MODEL S-12

opportunity cost. No-trade price of televisions in Foreign is 1/2, lower than the
world price of 1. So Foreign will specialize in televisions, export televisions, but
import cars. Autarky price of cars in Home is 2/3, lower than the world price of 1.
So Home will specialize in cars, export cars, and import televisions.
d. In the trade equilibrium, what is the real wage at Home in terms of cars and in
terms of TVs? How do these values compare with the real wage in terms of
either good in the no-trade equilibrium?
Answer: Workers at Home are paid in terms of cars because Home exports cars.
Home is better off with trade because its real wage in terms of televisions has
increased.
MPLC 5 3 units of car
Home wages with trade 5 or
(PC/PTV) ? MPLC 5 (1) ? 3 5 3 units of TV

MPLC 5 3 units of car

Home wages without trade 5 or

(PC/PTV) ? MPLC 5 (2/3) ? 3 5 2 units of TV

e. In the trade equilibrium, what is the real wage in Foreign in terms of TVs and
in terms of cars? How do these values compare with the real wage in terms of
either good in the no-trade equilibrium?
Answer: Foreign workers are paid in terms of televisions because Foreign ex-
ports televisions. Foreign gains in terms of cars with trade.
(PTV/PC) ? MPL TV 5 (1) ? 2 5 2 units of cars
*

Foreign wages with trade 5 or

*

MPL TV 5 2 units of TV

(P *TV/P *C) ? MPL*TV 5 (1/2) ? 2 5 1 unit of car

Foreign wages without trade 5 or
*
MPL TV 5 2 units of TV
f. In the trade equilibrium, do Foreign workers earn more or less than those at
Home, measured in terms of their ability to purchase goods? Explain why.
Answer: At the trade equilibrium, real wages for Foreign workers are either 2
cars or 2 televisions, whereas real wages for Home workers are either 3 televi-
sions or 3 cars. Foreign workers earn less than workers at Home in terms of cars
because Home has an absolute advantage in the production of cars. Home
workers also earn more than Foreign workers in terms of televisions. Under
the Ricaridan model, wage differences are determined by absolute advantage
or MPL (productivity).
8. Why do some low-wage countries, such as China, pose a threat to manufacturers
in industrial countries, such as the United States, whereas other low-wage
countries, such as Haiti, do not?
Answer: To engage in international trade, a country must have a minimal
threshold of productivity. Countries such as China have the productivity neces- sary
to compete successfully, but Haiti does not. China can enter the world mar- ket
because it beats other industrial countries with a lower price. Under perfect
competition, price is determined by both wage rate and productivity; that is, P =
Wage/MPL. So the lower price in China comes from both a low wage rate and
S-13 SOLUTIONS ◼ SOLUTIONS
CHAPTER 2 TRADE
◼ CHAPTER
AND 2 TRADE
TECHNOLOGY: THEAND TECHNOLOGY:
RICARDIAN MODEL THE RICARDIAN MODEL S-13

high MPL. Haiti has a low wage rate, but also low MPL. So Haiti’s price is not
low enough to enter the world market.
Answer Problems 9 through 11 using the chapter information for Home and Foreign.
9. a. Suppose that the number of workers doubles in Home. What happens to the
Home PPF and what happens to the no-trade relative price of wheat?

Cloth, QC
(yards)

Slope 5 ] (MPLC /MPL ) 5 ]1/2

MPLC · L9 W

5 100

MPLC · L
5 50

MPLW · L 5 100 MPLW · L95 200

Wheat, QW (bushels)

Answer: With the doubling of the number of workers in Home, it can now
produce 200 5 4 ? 50 bushels of wheat if it concentrates all resources in the
production of wheat, or it could produce 100 5 2 ? 50 yards of cloth by devot-
ing all resources to the production of cloth. The PPF shifts out for both wheat
and cloth. The no-trade relative price of wheat remains the same because both
MPLW and MPLC are unchanged.
b. Suppose that there is technological progress in the wheat industry such that
Home can produce more wheat with the same amount of labor. What happens
to the Home PPF, and what happens to the relative price of wheat? Describe
what would happen if a similar change occurred in industry.

Cloth, QC
(yards)

MPLC · L
5 50
Slope = –1/4

Slope = –1/2
MPL · L 5 100 MPL9 ·L 5 200
W W

Wheat, QW (bushels)
S-14 SOLUTIONS ◼ SOLUTIONS
CHAPTER 2 TRADE
◼ CHAPTER
AND 2 TRADE
TECHNOLOGY: THEAND TECHNOLOGY:
RICARDIAN MODEL THE RICARDIAN MODEL S-14

Answer: Because the technological progress is only in the wheat industry,

Home’s production of cloth remains the same if it devotes all of its resources
to producing cloth. If instead Home produces only wheat, it is able to produce
more wheat using the same amount of labor. Home’s PPF shifts out in the di-
rection of wheat production. Recall that the relative price of wheat is given by
PW/PC 5 MPLC/MPLW. With the technological progress in wheat, the marginal
product of labor in the wheat production increases. Thus, the relative price of
wheat decreases•. As shown in the graph, the relative price of wheat drops
from 1/2 to 1/4.
If instead, the technological progress is in the cloth industry, we would have
the opposite results. Home’s PPF would shift out in the direction of cloth
produc-tion and the relative price of wheat would increase.
10. a. Using Figure 2-5, show that an increase in the relative price of wheat from its
world relative price of 2/3 will raise Home’s utility.
Cloth, QC
(yards) Slope 5 ]1

D
50
C
40
U3

U2 Slope 5 ]2/3

25

U1
Slope 5 ]1/2
B
40 50 100
Wheat, QW (bushels)

Answer: The increase in the relative price of wheat from its international equi-
librium of 2/3 allows Home to consume at a higher utility, such as at point D.
b. Using Figure 2-6, show that an increase in the relative price of wheat from its
world relative price of 2/3 will lower Foreign’s utility. What is Foreign’s
utility when the world relative price reaches 1, and what happens in Foreign
when the world relative price of wheat rises above that level?
 SOLUTIONS ◼ CHAPTER 2 TRADE AND TECHNOLOGY: THE RICARDIAN MODEL S-
15

Cloth, Q*
C

(yards)

100 B*

C*
60
D*
50 U* Slope 5 ]2/3
2

U*
U* 3
1

50 60 100
Wheat, Q * (bushels)
W

Answer: The increase in the relative price of wheat from its international
equi-librium of 2/3 lowers Foreign’s utility to U *3 with consumption at D*.
When the international price reaches 1, it becomes the same as Foreign’s no-
trade relative price of wheat. Thus, Foreign consumes at point A*, the no-trade
equilibrium. If the international price rises above 1, then it would be greater than
Foreign’s no-trade relative price of wheat. In this case, Foreign would switch to
exporting wheat instead of exporting cloth. The world price line now moves
inside the PPF, which will lower the welfare than no trade case.
11. (This is a harder question.) Suppose that the Home country is much larger than the
Foreign country. For example, suppose we double the number of workers at Home
from 25 to 50. Then Home is willing to export up to 100 bushels of wheat at its
no-trade price of PW/PC 5 1/2, rather than 50 bushels of wheat as shown in Figure
2-11. In the following, we draw a new version of Figure 2-11, with the larger
Home country.
a. From this figure, what is the new world relative price of wheat (at point D)?
Answer: The intersection of the foreign imports and home exports gives the
new international equilibrium relative price of wheat, which is 1/2.
S-16 SOLUTIONS ◼ CHAPTER 2 TRADE AND TECHNOLOGY: THE RICARDIAN MODEL

PW/PC

Foreign imports Home exports

D
1/2

0 50 80 100 Wheat

b. Using this new world equilibrium price, draw a new version of the trade equi-
librium in Home and in Foreign, and show the production point and consump-
tion point in each country.
Answer: The international price of 1/2 is the same as Home’s no-trade
relative price of wheat. Home would consume at point A and produce at point
B ´. The difference between these two points gives Home exports of wheat of
80 units. (Notice that workers earn equal wages in the two industries, so
production can occur anywhere along the PPF.)

Cloth, QC
(yards)

Slope 5 ]1/2

100

A
50

U1
B9

100 180 200

Wheat, QW (bushels)
Home
 SOLUTIONS ◼ CHAPTER 2 TRADE AND TECHNOLOGY: THE RICARDIAN MODEL S-17

Cloth, Q*
C

(yards)

B*
100

D*
U*
60 C* Slope 5 ]1/2 3

50 U*
2
A* Slope 5 ]2/3

U*
1

50 60 100 Wheat, Q * (bushels)

W
Foreign

Because the international price of 1/2 is lower than Foreign’s no-trade relative
price of wheat, Foreign is able to consume at point D*, which gives higher
gains from trade than at point C*.
c. Are there gains from trade in both countries? Explain why or why not.
Answer: The foreign country gains a lot from trade, but the home country
neither gains nor loses: its consumption point A is exactly the same as what it
would be in the absence of trade. This shows that in the Ricardian model, a
small country can gain the most from trade, whereas a large country may not
gain (although it will not lose) because the world relative price might equal its
own no-trade relative price. So the large country does not see a terms of trade
gain (TOT). This special result will not arise in other models that we study,
but illustrates how being small can help a country on world markets!
12. Using the results from Problem 11, explain why the Ricardian model predicts that
Mexico would gain more than the United States when the two countries signed the
North American Free Trade Agreement, establishing free trade between them.
Answer: The Ricardian model predicts that Mexico would gain more than the United
States when the two countries join the regional trade agreement because rela-tive
to the United States in terms of economic size, Mexico is a small country. For United
States, the world price of its exports is similar to the domestic price. Thus, there is
not much TOT gain. But for Mexico, the world price is much higher than the
domestic price of its exports, so Mexico sees a big TOT improvement.
 Trade and Technology:
The Ricardian Model

1. Reasons for Trade

2. Ricardian Model
3. Determining the Pattern of International Trade
4. Solving for International Prices
 Introduction

Where did Shaun White’s

snowboard come from?
• In 2005 the United States imported
(i.e., purchased from other countries)
$59 million of snowboards from 20
different countries.
• China exported (i.e., sold to another
country) more than $18 million worth
of snowboards to the United States in
2005 and $21 million in 2009.
Doug Pensinger/Getty Images

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 Introduction

TABLE 2-1 U.S. Imports of Snowboards, 2012

Table 2-1 shows that the U.S.
imported 570,000 snowboards
from nearly 20 countries in
2012 worth more than $33
million.

This pattern raises the question:

with all the manufacturing
capability in the United States,
why does it purchase
snowboards from these
countries at all instead of
producing them domestically?

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Introduction

In this chapter we will:

• learn the reasons why countries trade,

• distinguish between absolute and comparative advantage,

• understand the Ricardian model,

• understand the no-trade equilibrium using each

country’s PPF and indifference curve,
• solve for wages across countries,

• solve for international prices, and

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Introduction
• derive the home export supply and Foreign import demand
curve and how to arrive at international trade equilibrium.

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Introduction
Reasons countries trade goods with each other
• Differences in the technology used in each country
(i.e., differences in each country’s ability to
manufacture products)
• Differences in the total amount of resources (including
labor, capital, and land) found in each country
• Differences in the costs of offshoring (i.e., producing
the various parts of a good in different countries and
then assembling it in a final location)
• The proximity of countries to each other (i.e., how
close they are to one another)

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Introduction

In this chapter, we focus on technology differences

across countries as an explanation for trade, called the
Ricardian model.
• The Ricardian model explains how the level of a
country’s technology affects its trade pattern.
• It also explains the concept of comparative advantage
and why it works as an explanation for trade patterns.

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1 Reasons for Trade

Proximity

• The closer countries are the lower the costs of

transportation. For example, the largest trading
partner of most European countries is another
European country.
Resources

• Geography includes the natural resources, as well as

labor resources and capital. A country’s resources
are often collectively called its factors of production,
the land, labor, and capital used to produce goods and
services.

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1 Reasons for Trade

Absolute Advantage

• When a country has the best technology for producing a

good, it has an absolute advantage in the production
of that good.
• Absolute advantage is not a good explanation for
trade patterns.
Comparative Advantage

• Instead, comparative advantage is the primary

explanation for trade among countries.

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1 Reasons for Trade
• A country has comparative advantage in producing
those goods that it produces best compared with how
well it produces other goods.

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1 Reasons for Trade

Comparative Advantage
SIDE BAR
Can Comparative Advantage Be
AP Photo/Julie Jacobson
Created? The Case of “Icewine”

• In some cases, a country can export a good without having

any advantage in the natural resources needed to produce it.
• One example is “icewine,” which is a type of wine
invented in Germany but is now also produced in the
Niagara Falls region of Canada and the United States.

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99
Economics, 3e | Feenstra/Taylor
 SIDE BAR
David Ricardo and Mercantilism
• Mercantilists believed that exporting was good
because it generated gold and importing was bad
because it drained gold from the national treasury.
Bettman/Corbis

• Mercantilists were in favor of high tariffs to ensure

high exports and low imports.
• Ricardo showed that countries could benefit from
international trade without having to use tariffs.
• Today, many of the worlds major international institutions
were founded at least in part on the idea that free trade
between countries brings gains for all trading partners.

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10
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Economics, 3e | Feenstra/Taylor
2 Ricardian Model

The Home Country

To develop a Ricardian model of trade, we will use an
example with two goods:
• Wheat and other grains are major exports of the U.S. and
Europe.
• Many types of cloth are imported into these countries.
For simplicity, we ignore the role of land and capital and
suppose that both goods are produced with labor alone.

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Economics, 3e | Feenstra/Taylor
2 Ricardian Model

The Home Country

We assume that labor is the only resource used to produce
goods. The marginal product of labor (MPL) is the
extra output obtained by using one more unit of labor.
• In Home, one worker produces 4 bushels of wheat, so
MPLW = 4.
• Alternatively, one worker can produce 2 yards of cloth,
so MPLC = 2.

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2 Ricardian Model

The Home Country

Home Production Possibilities Frontier

• We can graph Home’s production possibilities frontier

(PPF) using the marginal products for wheat and cloth.
• The slope of the PPF is also the opportunity cost of wheat,
the amount of cloth that must be given up to obtain one
more unit of wheat.
• If Home had 25 workers and all were employed in wheat,
Home could produce 100 bushels. If all were employed in
cloth they could produce 50 yards.

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Economics, 3e | Feenstra/Taylor
2 Ricardian Model

The Home Country

Home Production Possibilities Frontier
FIGURE 2-1
The Home PPF is a
straight line between 50
yards of cloth and 100
bushels of wheat.
The slope of the PPF equals
the negative of the
opportunity cost of wheat.
Equivalently, the
magnitude of the slope can
be expressed as the ratio of
the marginal products of
labor for the two goods.

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2 Ricardian Model

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Economics, 3e | Feenstra/Taylor
2 Ricardian Model

The Home Country

Home Indifference Curve
We will represent demand in the Home economy using
indifference curves which have the following properties:
• All points on an indifference curve have the same level
of utility.
• Points on higher indifference curves have higher utility.

• Each indifference curve shows the combinations of two

goods, such as wheat and cloth, that a person or economy
can consume and be equally satisfied.

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Economics, 3e | Feenstra/Taylor
2 Ricardian Model

Home Indifference Curve

FIGURE 2-2 Home Equilibrium with No Trade
Points A and B lie on the
same indifference curve and
give the Home consumers
the level of utility U1.
The highest level of Home
utility on the PPF is obtained
at point A, which is the no-
trade equilibrium.
Point D is also on the PPF
but would give lower utility.
Point C represents a higher
utility level but is off of the
PPF, so it is not attainable
in the absence of
international trade.

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Economics, 3e | Feenstra/Taylor
2 Ricardian Model

The Home Country

Opportunity Cost and Prices

• The slope of the PPF reflects the opportunity cost of

producing one more bushel of wheat.

• Under perfect competition the opportunity cost of

wheat should also equal the relative price of wheat.
• Price reflects the opportunity cost of a good.

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Economics, 3e | Feenstra/Taylor
2 Ricardian Model

The Home Country

Wages
• In competitive markets firms hire workers up to the point at
which the hourly wage equals the value of one more hour of
production.
• The value of one more hour of labor equals the amount
of goods produced in that hour (MPL) times the price of
the good.
• Labor will be hired up to the point where wage equals P
• MPL for each industry.

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Economics, 3e | Feenstra/Taylor
2 Ricardian Model

The Home Country

Wages
• Use the equality of the wage across industries to obtain
the following equation:
PW • MPLW = PC • MPLC
• Rearranging terms, we see that
PW /PC = MPLC /MPLW
• The right-hand side of the equation is the slope of the
production possibilities frontier (the opportunity cost of
one more bushel of wheat).

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Economics, 3e | Feenstra/Taylor
2 Ricardian Model
• The left-hand side of the equation is the relative price
of wheat.

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2 Ricardian Model

The Foreign Country

• Assume a Foreign worker can produce one bushel of wheat
or one yard of cloth.
MPL*W = 1, MPL*C = 1
• Assume there are 100 workers available in Foreign.

• If all workers were employed in wheat they could produce

100 bushels.
• If all workers were employed in cloth they could
produce 100 yards.

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Economics, 3e | Feenstra/Taylor
2 Ricardian Model

The Foreign Country

Foreign Production Possibilities Frontier
FIGURE 2-3

The Foreign PPF is a

straight line between
100 yards of cloth and
100 bushels of wheat.

The slope of the PPF

equals the negative of the
opportunity cost of wheat.

The opportunity cost is the

amount of cloth that must
be given up (1 yard) to
obtain 1 more bushel of
wheat.
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Economics, 3e | Feenstra/Taylor
2 Ricardian Model

Comparative Advantage

• A country has a comparative advantage in a good when it has

a lower opportunity cost of producing than another country.
• By looking at the chart we can see that Foreign has a
comparative advantage in producing cloth. Home has
a comparative advantage in producing wheat.
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Economics, 3e | Feenstra/Taylor
2 Ricardian Model

The Foreign Country

Comparative Advantage
FIGURE 2-4
Foreign Equilibrium with No Trade
The highest level of
Foreign utility on the
PPF is obtained at
point A*, which is the
no-trade equilibrium.

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Economics, 3e | Feenstra/Taylor
3 Determining the Pattern of International Trade
APPLICATION
Comparative Advantage in Apparel, Textiles, and Wheat
TABLE 2-2 Apparel, Textiles, and Wheat in the United States and China
This table presents sales per employee for the apparel and textile industries
in the United States and China, as well as bushels per hour in producing
wheat. The United States has an absolute advantage in all of these
products, but it has a comparative advantage in producing wheat.

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Economics, 3e | Feenstra/Taylor
3 Determining the Pattern of International Trade
APPLICATION
International Trade Equilibrium
What happens when goods are traded between Home and
Foreign? We will see:
• that a country’s no-trade relative price determines
which product it will export and which it will import.
• the no-trade relative price equals its opportunity cost
of production.
• the pattern of exports and imports will be determined by
the opportunity costs of production in each country—their
comparative advantage.

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Economics, 3e | Feenstra/Taylor
3 Determining the Pattern of International Trade

International Trade Equilibrium

Examining each country’s no-trade relative price we can
determine which product it will export and which it will import.

• The relative price of cloth in Foreign is PC /PW = 1.

• The relative price of cloth in Home is PC /PW = 2.

• Therefore, Foreign would want to export cloth to Home—
they can make it for $1 and export it for more than $1.
• Home will export wheat and Foreign will export cloth.

Both countries export the good for which they have

the comparative advantage.
© 2014 Worth Publishers International
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Economics, 3e | Feenstra/Taylor
3 Determining the Pattern of International Trade

International Trade Equilibrium

The two countries are in an international trade equilibrium when
the relative price of wheat is the same in the two countries.
To fully understand the international trade equilibrium, we
are interested in two issues:
• Determining the relative price of wheat (or cloth) in the
trade equilibrium
• Seeing how the shift from the no-trade equilibrium to the
trade equilibrium affects production and consumption in
both Home and Foreign.

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Economics, 3e | Feenstra/Taylor
3 Determining the Pattern of International Trade

International Trade Equilibrium

• The relative price of wheat in the trade equilibrium will

be between the no-trade price in the two countries.
• For now assume the free-trade price of PW /PC is 2/3
(between the price of ½ in Home and 1 in Foreign).
• We can now take this price and see how trade
changes production and consumption in each country.
• The world price line shows the range of consumption
possibilities that a country can achieve by specializing in
one good and engaging in international trade.

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Economics, 3e | Feenstra/Taylor
3 Determining the Pattern of International Trade

International Trade Equilibrium

Change in Production and Consumption
FIGURE 2-5 (1 of 3) Home Equilibrium with Trade
With a world relative
price of wheat of 2/3,
Home production will
occur at point B.

Through international
trade, Home is able to
export each bushel of
wheat it produces in
exchange for 2/3 yard
of cloth.

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Economics, 3e | Feenstra/Taylor
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36 Woodward S., fruiterer
37 Webb Jubal, cheesemonger
38 Clarke G., pork butcher
39 Seaman & Co. drapers
40 Theobald William, boot maker
41 Herbert William H., confectioner
42 Mansfield C., Britannia Brewery Tap
43 Richmond Joseph, grocer
44 Allen John, hosier, &c.
45 Bailey C., cheesemonger
46 Sheppard George, baker
47 & 48 Wickham John, draper
49 Lawrence Henry, chemist
50 Hughes Wm. Hallett
51 Sutor John P., baker
52 Fowkes Hy. C., butcher
53 Jones T., the Wheatsheaf
54 Pash Daniel, bootmaker
55 Winston Edwin F., Duke of Sussex
56 Green G., bread and biscuit baker
57 Hoadley Alexander, coach builder
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NORTH SIDE.
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2 Guy Wm. turnery warehouse
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Wesleyan Chapel
Clarence place
Charles Keen, artists’ manufacturing colourman
Champion Thomas, grainer
Beacock Thos. surveyor
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34 English John, butcher
35 White W. A., fishmonger
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37 Collins G., corn and flour merchant
38 Wright Francis, chemist and dentist
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28 Goodman John, draper
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31 Brewer and Son, corn and coal merchants
32 Norris G. A., chronometer maker
34 Sharpe G. Y., chemist
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37 Hay John
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4 Cust William
5 Justice James
6 King Thomas
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CATHERINE COTTAGES.

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4 Jerred Mrs, dressmaker
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Holland park terrace,

Notting hill.
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3 Hyde Capt. George
4 Kitchen Mrs.

Holland place,
Kensington road.
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6 Bailey W.
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Holland road,
Kensington road.
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1 Phillips Mrs
2 Allnutt Henry
3 Weston Miss
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139 Myers Michael
141 Bathurst —
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143 Best Mrs Rycroft
144 Bruce William Downing
145 Combe John
146 Rushout Capt.
147 Hopkins William
148 Glen William Cunningham
149 Fitch George
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152 Dwight Mrs
153 Lockwood Miss
154 Evans Henry Sugden
155 Andrews Geo. Frederick
156 Symonds Mrs
158 Reade Charles Darby
159 Page William
160 Butler —
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163 Guthrie Miss
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165 Peach Capt. Robert Atkins, R.A.
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Holland street,
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1 Bennett T., plumber
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8 Singleton Frederick, upholsterer
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11 McDonald Mrs
12 Hartley Robert
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14 Roberts Mrs
15 Sheppard Miss
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15a Ingelow William
16 Buckmaster Rev. Ralph Neville
17 Pelham Mrs
18a Hubble Geo. dairyman
Heylin Henry, school
18 Smith J., tailor
19a Lawrence W., plumber
19 Donkin R., bootmaker
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Holland street upper,

Holland street, Kensington.
3 Inglish Mrs
4 Wheeler John
5 St. Mary Abbot’s Catholic Chapel—Foley Rev. J.
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Holland road, Kensington.
1 Fisher Mrs
2 Watson Dr. Chas. George M.D. surgeon, Kensington Homœopathic
Dispensary
3 Hughes Mrs
4 Taylor Mrs
5 Ogle Connell
6 Miller Mrs
7 Symmons Miss
8 Dyer Mrs J
9 Bancks Miss
10 Nicholas Edwin
11 Powell Miss
12 Harris John
13 Hudson Capt. Robert Rackett, R.N.
15 Whyte Mrs
16 Edwards Mrs
Messenger G. E., Crown and Sceptre

Holland villas road,

Holland road, Kensington.
Pillar letter box.
1 Fry Alexander
2 Millington Mrs
3 Ward R.
4 Bailey John Rand
5 Molyneux Gisborno
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7 Budd Capt. Vincent
8 Ionides Constantine Alexander
9 Keighley Thomas Dodd
10 Stack —
11 Nash Robt. Harefield lodge
12 Lemmon Thomas Warne, Stansted lodge
13 Luke Miss, Stamford lodge
14 Dowling Edward Samuel
15 De Leon Dr. Hananel
16 Cama D. D., Parsee villa
17 Perrin Edward
18 Carritt Frederick
19 Welsby Mrs. W. Newland
20 Hill Mrs
21 Grierson James
22 Mackeson Wm. Wyllis
23 Perrin Smethurst
24 Curtis Mrs
25 Pease Geo. The Cedars
26 Morgan Daniel
27 Renault Edward
28 Westall Dr. Edward M.D. physician
29 Carrington George Wm.
30 Cox Chas. William
31 Plomer Mrs. Eden lodge
32 Munday Miss, Southgate house
33 West Mrs
34 Batt Henry Edward, Castlebar house
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36 Lehne Francis
37 Bell Major Evans

Hope terrace,
Uxbridge road, Notting hill.
1 Simpson Mrs, the Duke of Clarence
2 Doggett Mrs
3 Burgess Wm. baker
4 Jewson Alfred, carver & glider
5 Miller George, furniture dealer
6 Miller Richard, butcher
7 Dare R. W. & Co. corn dealers
8 Humphrey Mrs, furniture dealer
9 Evans Wm. fishmonger

Horbury crescent,
SEE END OF STREET LIST.

Hornton street,
Campden hill, Kensington.
1a Swindley & Co. auctioneers
Kensington Estate Office
Kensington British Schools
1 Clarke Wm. piano maker
2 Balls Thomas Henry
3 Manning Mrs
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5 Baxter John
6 Sanley Miss
7 Thompson Charles
8 Marsh Mrs
9 Potter George Augustus
10 Neele Mrs
11 Charretie Capt. John
12 Colbeck Thomas R.
13 Clements William
14 Smith Thomas Forsyth
15 Horning Mrs
16 Edwards Thomas
17 Name refused
18 Perry Miss
19 Starling Dr. John M.D. physician
22 Wilson Mrs
23 Clarke John James
25 Byrne Matthew, painter
26 Alexander William
27 Morini Henry
28 Taylor Walter, tailor
29 Devereux Miss, Catholic repository
30 Hopkins B. R., fancy repos.
31 Smith Spencer, coal merchant
The Fire Engine Station
Kennel John Hornton cot.
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Holland street, Kensington.
4 Scossa P., beer retailer
5 Weale Mrs
6 Harrington Mrs.
7 Annis George
8 Mutton John
9 Corston Mrs
10 Cozens Benj. Howard

Hornton villas,
Holland street, Kensington.
1 Watson William
2 Hutchinson Hy. Parker
3 Graham Barron
4 Jaques John jun.

UPPER HORNTON VILLAS.

5 Aston Theodore, Hornton lodge

Howley place,
Park place villas, Maida hill.
2 Spencer and Co.
3 Wigram Geo. Vicesimus
4 Brocksley Wm. Crowgey
5 Flux William
6 Watts Isaac
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8 Oxenford Edward
9 Busby Mrs & Miss
10 Hassels Rev. Charles Stephen
11 Chauncey Charles A. W.
12 Sayer Miss
13 Gold Miss Ann
14 Searle Mrs & White Mrs
16 Howell Charles
17 Tremenheere J. H.
18 Freeman Mrs
19 Girdwood Gilbert Finlay M.D. physician
Girdwood Finlay Thomas, solicitor
20 Rowe Mrs G. C., ladies’ school, Rowe G. Chas. Warwick hall
21 Helder William
22 Burton Henry M.
27 Plowman Charles
29 Devonald Miss
31 Helder Stuart
35 Octave Delapierre, Consul Belgian Legation
37 Stephens Samuel John, professor of music
39 Barton John

Hyde park gardens,

Hyde park.
1 Brown William
3 Martins Sir William
4 Rose Hon. Sir Geo. F.R.S.
5 Underwood Mrs.
6 Dawes Henry
7 Forbes Mrs.
8 Coultman Wm. Batchelor and Lady
9 Dugdale John
10 Lucas Thomas
11 Bishop Lady
12 Dent Thomas
13 Portland Duke of
14 Coghlan Henry Thomas
15 Sandemann George
16 Gibbs William
17 Smith Samuel
18 Drummond Mrs.
19 Lucas Mrs
20 Loyd Lewis
21 Woods Henry M.P.
22 Scarmanga Demetrius Peters
23 Arbuthnot Geo. F.R.G.S.
24 Blyth James
25 Arbuthnot Archibald F.
26 Morris James
27 Woods Miss
28 Morris Miss
29 Vassall Lady
30 Nelson Charles C.
31 Black Alexander
32 Trench Capt. William
33 Holland Rev. Edward
34 Mills Arthur
35 Macleay George
36 Montefiore Nathaniel
37 Campbell Mrs

Hyde park gate,

Kensington Gore.
1 Vaughan John
Newcomen Captain
2 Isaac Samuel
3 Feversham Dowager Lady
4 De Stern Baron Hermann
5 Edwards Thomas Dyer
6 Mitchell Sir William, Kt.
8 Wilson Lady Belford
9 Laing Seton
10 Marras Giacinto
11 Barlow James Pratt
12 Salter Mrs King
13 Watney James, junior
Kidd Mrs, Cleve lodge
14 Burnard Arthur Charles
15 Hawkins Major Rhode
16 Nicholls Henry John
18 Lawrence Robert, The Campden Arms
21 Paxton W.
22 Gambier Sir Edward John and Lady

Hyde park gate south,

Kensington gore.
1 Powell Mrs
2 Vichan Madame
3 Suffield Dowager Lady
4 Symonds Edward Robert barrister
5 Brown Miss
6 Ellicomb Richard Rous
7 Elliott George Letsom
8 West Mrs
9 Cooke Edward William R.A., F.R.S., &c. The Ferns
10 King John
11 Mylne Robt. Wm.
12 Harper Lt.-Col. George
13 Copeland —
14 Rivaz Charles
15 Dale Edward Samuel
16 Archdale George
17 Redgrave Samuel
18 Redgrave Richard R.A.
19 Cope Charles West R.A.
20 Miller Colonel James
21 Price Charles
22 Neil John
23 Catley H. Griffin
Catley William Esdaile
24 Coltman Francis
26 Leonard Patrick

Hyde park place,

Hyde park.
1 Ashburner Dr. John
1a Macenkenzie Jas. Thompson, Surrey house
2 Cheadle Dr. W. B.
2a Lordan John
3 Sykes William
3a Harrison Alex. estate agent
4 Mackinnon W. Alexander
5 Gibson Right Hon. T. Milner M.P.
6 Harrison Isaac
7 Hankey Lieut.-General and Lady Emily
8 Jackson’s Hyde park hotel
10 Caldecott Mrs
11 Wigram Edward
12 Parbury George
14 Ralli Peter P.
15 Heywood John Pemberton
16 Lushington Miss
17 Chown Dr. Wm. D.
18 Horsley Mrs.
19 Groten Mrs. E.
21a Fennel James, auctioneer and house agent
20 Clissold Joseph, Hanover square tavern
21 Morris Francis
22 Sachs T. R., jeweller
23 Smith Richard
24 Parratt Edward
25 Pepys Edmund
St. George’s burial ground, Chappell T. B., clerk
27 & 28 Rope J. W., confectioner
29 Young Mrs
30 Liddiard Andrew
31 Price Thomas
32 Perrins Mrs
33 Price Thomas

Hyde park square,

Hyde park.
2 Davidson Chas. Thomas
3 Brooking John Savery
4 Baker Sir George Bart.
5 Wyatt Sir Matthew
6 Whitehead Lady
7 England Mrs
8 Knight Thomas
10 Christie Charles William
11 Lees James
12 Donell Henry James
13 Mackeson Edward
14 Rennie William
15 Cowie Thomas Stock
16 Shaw Thomas
17 Gainsborough Lady
18 Chinnery Rev. Nicholas Bart. and Lady
19 Henriqu es Fredk. George
20 Levy Moses
21 Maudsley Mrs
22 Hunt Robert H. Carew; and Sidbury, Devon
24 Henderson Mrs
25 Hill Charles
26 Austin Capt. Frederick Lewes
27 Galloway Rich. Hodgson
28 Shepherd Rev. Robert
29 Pinto Abraham
30 Scott Sir James Sibbald Bart.
31 Griffiths Chas. Marshall
32 Harding Mrs General
33 Trower George Stanhurst
34 De Bruyn Miss
35 Moses Jacob Henry
36 Longman Wm. Sir F.R.G.S.
39 Smith Gen. Sir F. J. M., K.H., F.R.S.
40 Hadow James R.
41 Northcote Mrs
42 Holland Edwin
43 Twining Samuel Harvey
44 Easton Mrs.
45 Stopford Robert
46 Pearson Henry Robert

Hyde park street,

Hyde park square.
1 Smith Wm. H., F.R.G.S.
2 Mumm Mrs.
3 Lock Captain Robert
4 Scott Mrs Henry
5 Saltmarshe Mrs Chrstphr.
6 McGrigor Sir Charles R., Bart.
7 Bayley Rev. Emilius, B.D.
8 Bird Miss
9 Rendel Mrs
10 Currie Geo. R. Woodhouse and Hon. Miss
11 Coles James
12 Miller Edward
14 Lacon Mrs Henry
15 Bull John Pannet
16 Willink Wm. Wilkinson
17 Nicholls Lady

Hyde park terrace,

Bayswater road.
1 Cragie Mrs
2 Vincent George
3 Allan Dr. James B., physician
4 Wood Lieut.-Col. Wm.
5 Bruxner Michael Fredk.
6 Copeland Samuel
7 Reid Miss
8 Brown Thomas F.R.G.S.
9 Hatfield Gilliat
10 Holland James
11 Hornby William
12 Young Charles Baring F.R.C.S.
13 Nicol James Dyce M.P.
14 Romilly Lord, Master of the Rolls
15 Ackers George Holland
16 Dalgetty Fredk. Gorham
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