Question

1. [6 points] Consider the Ricardian model with two economies (Mexico and the U.S.A.) and two commodities (goods and services). The marginal products of labor for each commodity are as follows: Services Goods Mexico │ MPL*S = 1/4 MPL*G = 1/2 U.S.A. │ MPLS = 1 MPLG = 1 Assume the two economies are closed and prices of Services are: pS = $2, and p*S = 12 pesos. (a) Calculate the autarky price of Goods in both countries: pG, and p*G

Answer 1

Answer:

The Ricardian Model as described by David Ricardo is a model which explains  trade between two countries and the products which they are most likely to export. The answer to your problem is given below.

Explanation:

(a) Calculate the autarky price of Goods in both countries: pG, and p*G.

The autarky price here means a price at which there will be no trade between the two countries:

Data:

The marginal product of labor in service industry of home country:

MPLS = 1

The marginal product of labor in goods industry of home country:

MPLG = 1

The marginal product of labor in service industry of foreign country:

MPLS* = 1/4

The marginal product of labor in goods industry of foreign country:

MPLG* = 1/2

The price of services in home country is:  

Ps = $2

The price of goods in foreign country is:

Ps* = 12 Pesos

As per current exchange rate, the value of 12 Pesos is equal to $0.63.

source: https://mxn.currencyrate.today/usd/12

Thus,

Ps* = $0.63

The autarky price of goods in both countries are calculated as follows:

Ps/PG = MPLS/MPLG

2/PG = 1/1

PG = $2

And,

Ps*/PG* = MPLS*/MPLG*

0.63/PG* = (1/4)/(1/2)

PG* = $1.26