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Homework answers / question archive / In a Ricardian Model, suppose that the United States can produce 1 unit of wheat in 3 days of labor time and 1 unit of clothing in 4 days of labor time
In a Ricardian Model, suppose that the United States can produce 1 unit of wheat in 3 days of labor time and 1 unit of clothing in 4 days of labor time.
a. What is the autarky price ratio in the US?
b. If the world price ratio (terms of trade) is 1 wheat : 1 clothing, which good will the United States export and which will it import? Why?
c. Suppose that the world price ratio is 1 wheat : 0.5 clothing. Which good will the US export and which will it import? Why?
Autarky price ratio is the opportunity cost of choosing one product over another.
a. According to the given information, the autarky price ratio (wheat to clothing) in the US would be:
[Math Processing Error]=timeusedtoproducewheattimeusedtoproducecloth=34
b. If the world price ratio is 1 wheat : 1 clothing, the united States will export wheat as it gets same price for both the products from which it produces wheat more efficiently. Hence, it should import clothing.
c. If the world price ratio is 1 wheat : 0.5 clothing, the united States will export wheat as it gets higher price for it than clothing, and United States produces wheat more efficiently. Hence, it should import clothing.
