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Questions and Answers
What does the condition $LC + LG = L$ signify in an economy operating under autarky?
What does the condition $LC + LG = L$ signify in an economy operating under autarky?
- Sector G must produce more than Sector C.
- Labor can be ignored for production in equilibrium.
- All available resources must be concentrated in one sector.
- The total labor must be allocated between two sectors. (correct)
In the context of factor allocation in equilibrium, what does the symbol $Ï•C$ represent?
In the context of factor allocation in equilibrium, what does the symbol $Ï•C$ represent?
- The ratio of goods produced in both sectors.
- The share of total available labor employed in sector C. (correct)
- Total production in sector C.
- Capital utilized in sector G.
What is the significance of the equations derived in the context of equilibrium relations?
What is the significance of the equations derived in the context of equilibrium relations?
- They express relationships among inputs to maintain equilibrium. (correct)
- They determine the optimum price for goods produced.
- They show how labor affects capital allocation.
- They illustrate the importance of monopolistic production.
What does the equation $I = r · K + w · L$ represent?
What does the equation $I = r · K + w · L$ represent?
What does the term equilibrium level imply in the context of production?
What does the term equilibrium level imply in the context of production?
How is the equilibrium condition related to the allocation of the two inputs in the sectors?
How is the equilibrium condition related to the allocation of the two inputs in the sectors?
Which of the following statements is true about consumption under autarky?
Which of the following statements is true about consumption under autarky?
What does the parameter $δC$ represent in the allocation equations?
What does the parameter $δC$ represent in the allocation equations?
What does the term 'autarky' refer to in economic terms?
What does the term 'autarky' refer to in economic terms?
How does the Production Possibility Frontier (PPF) relate to the income line in a closed economy?
How does the Production Possibility Frontier (PPF) relate to the income line in a closed economy?
What does the equation $C = \frac{1}{aC} \cdot \phiC \cdot L$ represent?
What does the equation $C = \frac{1}{aC} \cdot \phiC \cdot L$ represent?
What does the term 'optimal production values' refer to?
What does the term 'optimal production values' refer to?
What is the significance of $ heta_C = \delta_C$ in equilibrium?
What is the significance of $ heta_C = \delta_C$ in equilibrium?
What is a defining feature of the equilibrium condition in the neoclassical version of the Ricardian theory?
What is a defining feature of the equilibrium condition in the neoclassical version of the Ricardian theory?
Which of the following accurately describes the term 'factor allocation' in relation to production?
Which of the following accurately describes the term 'factor allocation' in relation to production?
In the context of autarky, what is the relationship between production and consumption?
In the context of autarky, what is the relationship between production and consumption?
What does the Lagrange multiplier λ represent in the context of this problem?
What does the Lagrange multiplier λ represent in the context of this problem?
Which equation represents the income constraint in the model?
Which equation represents the income constraint in the model?
What do CC* and CG* represent in the context of this model?
What do CC* and CG* represent in the context of this model?
Which scenario is NOT addressed when calculating the equilibrium in the Ricardian model?
Which scenario is NOT addressed when calculating the equilibrium in the Ricardian model?
How is the optimal value CC* derived from the income constraint?
How is the optimal value CC* derived from the income constraint?
In the first-order condition ∂L/∂CG = 0, what does it imply about the utility maximization?
In the first-order condition ∂L/∂CG = 0, what does it imply about the utility maximization?
If δC represents the share of income allocated to good C, what is the relationship between CC* and total income I?
If δC represents the share of income allocated to good C, what is the relationship between CC* and total income I?
Which factor is implied in the calculation of CG* according to the model?
Which factor is implied in the calculation of CG* according to the model?
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Study Notes
Autarky Equilibrium
- In autarky, both goods are produced and factors are allocated across sectors.
- All factors must be used with the following conditions holding:
- The sum of labor in both sectors equals the total available labor.
- The sum of capital in both sectors equals the total available capital.
- The equilibrium level of production of good C is determined by the share of labor allocated to sector C, the productivity of sector C, and the price of good C.
- The equilibrium level of production of good G is determined by the share of labor allocated to sector G, the productivity of sector G, and the price of good C.
- In autarky, the production possibility frontier (PPF) coincides with the income line.
- The terms of trade are equal to the ratio of production technical coefficients.
- The equilibrium level of consumption of good C is a ratio of the share of income on good C and the total income, divided by the production technical coefficient.
- The equilibrium level of consumption of good G is a ratio of the share of income on good G and the total income, divided by the production technical coefficient.
- In equilibrium, the share of income consumed on good C corresponds to the share of workers employed in sector C.
- The equilibrium is represented graphically by the point where the marginal rate of transformation (MRT) equals the ratio of the prices of the two goods.
Open Economy Equilibrium
- The open economy equilibrium is a state where the production and consumption levels of each good are determined by both domestic and foreign demand and supply.
- In a two-country model, the open economy equilibrium is characterized by the equalization of both relative prices and relative wages across countries.
- The equilibrium is reached through trade, where each country specializes in the production of the good where it has a comparative advantage and trades it for the other good.
- The equilibrium is influenced by factors such as the relative prices of goods, relative wages, and the size of the countries in terms of labor and capital.
- The equilibrium is reached through a process of adjustment where countries move from autarky to open economy equilibrium.
- The equilibrium is graphically represented by the point where the PPFs of both countries intersect at the terms of trade, which is the relative price of both countries' goods.
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