Which condition does not have to hold in a trade equilibrium of a Ricardian modelGroup of answer choicesExport from one country is equal to import to anotherCosts of imported goods are equal to costs of exported goods for both countriesReal wages are equalized in two countriesWorld price lies between autarky prices in both countries
Question
Which condition does not have to hold in a trade equilibrium of a Ricardian modelGroup of answer choicesExport from one country is equal to import to anotherCosts of imported goods are equal to costs of exported goods for both countriesReal wages are equalized in two countriesWorld price lies between autarky prices in both countries
Solution
In a Ricardian model of trade, the following conditions typically hold:
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Export from one country is equal to import to another: This is generally true as the total value of exports from one country should equal the total value of imports to the other in a balanced trade scenario.
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Costs of imported goods are equal to costs of exported goods for both countries: This is generally true as the cost of the goods a country imports should be equal to the value of the goods it exports.
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World price lies between autarky prices in both countries: This is generally true as the world price should lie between the two countries' autarky prices for trade to be mutually beneficial.
However, the condition that "Real wages are equalized in two countries" does not have to hold in a Ricardian model of trade. The Ricardian model assumes that labor is the only factor of production and that it is not mobile between countries. Therefore, differences in real wages can persist between countries even in trade equilibrium. The model focuses on comparative advantage and the gains from trade, not on wage equalization. So, the correct answer is "Real wages are equalized in two countries".
Similar Questions
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