Suppose that two countries called America and China conform to the assumptions of the Ricardian model. The unit labor coefficients for the two countries for producing steel (S) and airplanes (A) are: USLS= 10L/S USLA= 10L/ACLS= 20L/S CLA= 5L/ABoth countries have the same number of workers.
a.Based on this information, what is the pattern of comparative advantage?
b.Suppose the wage in the US was $5/L and the wage in China was $5/L. Will both countries be able to export the good of comparative advantage? (Hint: use the relationship between the price of a good and the cost of production, i.e. wage multiplied the number of workers it takes to produce the good. A country will only be able to sell the good if the nominal price is lower than in the other country.) c.Suppose the wage in the US was $5/L and the wage in China was $1/L. Will both countries be able to export the good of comparative advantage? Explain. Relevant videos: Ricardian model assumptions, Ricardian model basics, Domestic opportunity costs
Based on this information, what is the pattern of comparative advantage?
