Ricardian Problem Set

ECO 364
University of Toronto
Associate Professor Peter M. Morrow
Due: 10:00am, Tuesday, February 6th, 2024

Suppose that there are two countries (North and South) and two goods (computers and textiles). Let
CC and CT be consumption levels of computers and textiles. QC and QT are production levels of
computers and textiles. There are 100 workers in the North and 800 workers in the South.

Assume that each Northern worker can produce 10 computers or 20 textiles. Each Southern worker can
produce 1 computer or 4 textiles. The utility function in each country is
1 1
U (CC , CT ) = CC2 CT2

1. If acj is the unit labor requirement of good j in country c, calculate unit labor requirements of
computers and textiles in the North and South.

2. Which country possesses an absolute advantage in each good? Which country possesses a com-
parative advantage in each good?

3. If pcj is the price of good j in country c, profit maximization and constant returns to scale imply
the following system of equations

pN N N
C = w aC pSC = wS aSC pN N N
T = w aT pST = wS aST

Use this system of equations to calculate the relative price of computers to textiles in the North in
autarky and the relative price of computers to textiles in the South in Autarky. Show your work.

4. Draw the PPF for each country in autarky and label all relevant points and values (e.g. intercepts
and slopes) with computers on the vertical axis and textiles on the horizontal axis.

5. Use the Cobb-Douglas utility function to explicitly solve for the relative demand curve expression
in terms of CC , CT , and pC /pT . Show your work.

6. Calculate consumption and production of each good for each country in autarky.

7. Now suppose that countries open up an engage in trade. Draw the world RS and RD curves
labeling all relevant points and values. Based on this, do we specialization?

8. Solve for free trade values of consumption and production of each good in each country. What is
the pattern of trade? Do countries gain from trade relative to Autarky?