Consider the Ricardian model of trade with a continuum of goods as presented in

Question

Consider the Ricardian model of trade with a continuum of goods as presented in lecture and in the Temin reading, in which there are two countries (Britain and the rest of the world) and a continuum of goods from 1 to N. Draw the diagram for the model, taking care to label the axis and all curves in the diagram, and the equilibrium as x. Now suppose that the rest of the world (but not Britain) experiences technological change in a few industries where they were already exporting goods. Draw this change in technological progress on your diagram, taking care to label it. In the new equilibrium, is the rest of the world importing more goods from Britain or exporting more goods to Britain than before? What has happened to comparative advantage over the range of goods (1 to N) as a result of this technological change. Considering that the wage is a function of the range of goods exported by a country, have the wages in the rest of the world increased or decreased? Why?

Explanation / Answer

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