Question

12) The Ricardian two-country, two-good model predicts that there are potential benefits from trade, but NOT A) when both countries have the same types of technology available. B) when one country has significantly lower wages than the other country. C) the mechanism that determines which country will specialize in which good. D) the effect of trade on income distribution. E) when one country has an absolute advantage in the production of both goods.

Answer 1

Answer:

The answer is: D) the effect of trade on income distribution.

Explanation:

The Ricardian trade model assumes certain parameters that should enhance trade and the benefits associated with it. But a real problem with all models that favor unrestricted trade between nations is that trade can have substantial negative effects on the distribution of income within a country. Those involved in trade can benefit a lot, but local producers might be displaced and be worse off.