1. a. List the key assumptions
1. a. List the key assumptions of Ricardian comparativeadvantage.
b. Given the output per labor coefficients for each countrybelow (Q/L),
Which country has absolute advantage? ____________________
c. Which country has comparative advantage in Software__________
In Fuel Cells _______________
| Product | india (Q/L) | China (Q/L) |
| Software | 4 | 5 |
| Fuel Cells | 2 | 3 |
d. Complete the table below with opportunity cost of eachproduct in each country:
| Prodcut | India | China |
| Software | ||
| Feuls |
e. Graph the production possibilities frontier in each country.
f. At what price ratio (RoW) can both countries gain fromtrade?
g. Illustrate the gains from trade.
h. Given a wage = $1.00 in China and wage = $.65 in India, couldboth countries compete in Fuel Cells? Explain and calculate unitlabor costs in both countries in the fuel cell industry.
Answer:
1.
a. Key Assumptions of Ricardian ComparativeAdvantage
- There are only two countries.
- Both countries produce the same two commodities.
- Labor is the only factor of production in both countries and isfully employed in both countries.
- Labor supply is unchanged.
- All units of labor are homogenous.
- The factor of production (labor) is perfectly mobile withineach country but immmobile between the two countries.
- Technological know-how does not change in both countries.
- There are no trade barriers and restrictions between twocountries.
- There is no transportation cost incurred during the tradebetween two countries.
- Production of commodities follow constant returns.
- Both countries have similar taste.
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