Author Question: It is generally claimed that a movement from autarky to free trade consistent with Ricardian ... (Read 47 times)

ETearle · **on:** Jun 30, 2018

It is generally claimed that a movement from autarky to free trade consistent with Ricardian comparative advantage increases the economic welfare of each of the trade partners.

However, it may be demonstrated that under certain circumstances, not everyone in each country is made better off. Illustrate such a case.

Question 2

Suppose Russia's inflation rate is 200 over one year but the inflation rate in Switzerland is only 2. According to relative PPP, what should happen over the year to the Swiss franc's exchange rate against the Russian ruble?

What will be an ideal response?

tuate · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

(a) If inter-generational, or economic growth considerations are taken into account, then a country may end up specializing in a good that has no or few growth linkages with the rest of the economy (e.g., an enclave sector).
(b) If some of the residents of a country have tastes biased toward their exportable, then they may suffer due to the trade-affected increase in the market price of the exportable good.

Answer to Question 2

(Eruble/franc, t - Eruble/franc, t-1)/Eruble/franc, t-1 = 2 - 0.02 = 1.98
So there will be a 198 depreciation of the ruble against the franc or, conversely, a 198 appreciation of the franc against the ruble.