Ricardian Trade Model



The figures in the following table give the alternate combinations of steel and autos that Japan and South Korea can produce if they fully use their resources at their disposal with the best technology available to them. Answer the questions that follow based on these figures. You can submit your answers via a link to Google document.

                 Japan             South Korea

Steel     500                  900

Autos   600                  400

  1. Sketch the Production possibilities curves for Japan and South Korea separately. Locate steel on the vertical axis and autos on the horizontal axis of each graph.
  2. What is the opportunity cost of steel in Japan? What is the opportunity cost of steel in Korea? Based on your results, which country has comparative advantage in steel production?
  3. Based on your answer in Question #2, should the countries specialize in an area of production? If so, which country should specialize in steel production? In autos? Explain your answer.
  4. Suppose, in Autarky, Japan chooses to consume 300 units of steel and 240 units of autos. Label this point on the country’s PPC.
  5. Suppose, in Autarky, South Korea chooses to consume 450 units of steel and 200 units of autos. Label this combination on the country’s PPC.
  6. If these countries now want to develop trade relation, what would be the trade price of steel in the world market?
  7. Suppose the negotiated trade price is: 1 unit of steel for 1 Auto. Would it be a valid price?
  8. Using the trade price, draw the terms of trade line in each of the PPC graph you have drawn before. Write the slope of the TT line.
  9. If South Korea still wants to consume 450 units of steel, how many autos can it get through exchange when trade begins? Is it a better position than autarkic position?
  10. If Japan still wants to consume 240 autos, how much of steel it can get in exchange when trade begins? Would it be better than the autarkic position?
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