Exercise Set 1
THE RICARDIAN MODEL

1. To obtain the PPF for each country
2. To obtain the relative price in autarky
3. To indicate autarkic consumption
4. To obtain relative price under free trade
5. To obtain production and consumption points under free trade
6. To derive the pattern of trade
7. To show each country's exports and imports
8. To show how each country gains from trade
9. To show how a change in the terms of trade affect a country's welfare

Assumptions

1. Two countries - Japan (J) and Indonesia (I)
2. Two goods - cars (C) and rice (R)
3. One factor of production - labor (L)
4. CRTS production technology
5. Perfectly competitive product and labor markets

Exogenous Variables

• I/O coefficients: a_LC^J, a_LR^J, a_LC^I, a_LR^I     [Note: a_LR^I represents the labor required to produce 1 ton of rice in Indonesia]

• Labor force: L_J, L_I    [Note: L_J represents the total number of workers in Japan]

PPF and Autarkic Prices

• Select values for all the parameters.
• Click on Gimme PPF! to obtain the intercepts and slope of each PPF.
• Note: Quantity of cars, Qc, is plotted on the horizontal axis.

III. Questions

1. Select values for the parameters:

   I/O coefficients: a_LC^J = ________     a_LR^J = ________     a_LC^I = ________     a_LR^I = ________    

   Labor force: L_J = ________     L_I = ________    

2. Sketch the PPF in both countries.

3. Indicate the autarkic production and consumption points. (Assume suitable values; sketch indifference curves.)

4. Sketch the budget constraint under free trade.

5. What are the terms of trade for each country?

6. Indicate the production and consumption points under free trade.

7. What is the pattern of specialization? Of trade?

8. Does each country gain from trade?

9. Indicate the volume of exports and imports for each country.

10. Suppose that, due to changing market conditions, the terms of trade move in favor of Indonesia. Assuming some new value for the world relative price of cars, explain how each country's welfare is affected.