1.4 — The Ricardian View of Trade: Formal One-Factor Model — Practice Problems

Suppose the following facts to set up:

Plot wheat (w) on the horizontal axis and cars (c) on the vertical axis.

Question 1

Write the equation of each country’s production possibilities frontier (PPF).

Question 2

Graph each country’s PPF.

Question 3

Which country has an absolute advantange in producing each good? Why?

Question 4

Find each country’s opportunity cost of producing each good.

Question 5

Which country has a comparative advantage in producing each good? Why?

Question 6

Which country should specialize in producing which good?

Question 7

What will the range of possible terms of trade be?