1. Two Country Ricardo Model
Inputs
England-Portugal Wine-Cloth
Productivities q(i,j)=e(i,j) li,j
Spending Preferences Cobb Douglas d(i,j)
Size of Labor Forces L1, L2

2. Outputs
• Which goods are made in which Countries
• Quantities Consumed
• Prices
• National Incomes
• Utilities (weighted measure of consumption)

3. Three Different Equilibria as
Portugal Develops
• Demand (Cloth, Wine) = (2/3,1/3)
• Starting Productivities (Cloth , Wine):
England (1.0, 0.4) Portugal (0.4, 1.0)
• Then Portugal Improves in Cloth,
increasing from 0.4 to 0.7 to 1.0

4. Portugal Cloth Productivity = 0.4
1.000
0.900
0.800
Portugal’s
0.700
0.600
0.500
0.400
0.300
0.200
Productivity 0.100
0.000
Utility Income Cloth Wine
in Cloth 1.000
0.900
Portugal Cloth Productivity = 0.7
0.800
Improves 0.700
0.600
0.500
0.400
0.300
0.200
0.100
0.000
Utility Income Cloth Wine
Effect on Portugal Cloth Productivity = 1.0
1.000
Portugal 0.900
0.800
0.700
0.600
0.500
0.400
0.300
0.200
0.100
0.000
Utility Income Cloth Wine

5. 1.000
0.900
0.800
Portugal’s
0.700
0.600
0.500
0.400
0.300
0.200
Productivity 0.100
0.000
Utility Income Cloth Wine
in Cloth 1.000
0.900
Improves 0.800
0.700
0.600
0.500
0.400
0.300
0.200
0.100
0.000
Utility Income Cloth Wine
Effect on 1.000
England 0.900
0.800
0.700
0.600
0.500
0.400
0.300
0.200
0.100
0.000
Utility Income Cloth Wine

6. Three More Equilibria -England
England Consumption England Consumption
1.000 1.000
0.800 0.800
0.600 0.600
Trade Trade
0.400 0.400
0.200 0.200
0.000 0.000
Utility Income Cloth Wine Utility Income Cloth Wine
England Consumption
1.000
0.800
0.600
Trade
0.400
0.200
0.000
Utility Income Cloth Wine

7. Three More Equilibria - Portugal
Portugal Consumption Portugal Consumption
1.000 1.000
0.900 0.900
0.800 0.800
0.700 0.700
0.600 0.600
0.500 Trade 0.500 Trade
0.400 0.400
0.300 0.300
0.200 0.200
0.100 0.100
0.000 0.000
Utility Income Cloth Wine Utility Income Cloth Wine
Portugal Consumption
1.000
0.900
0.800
0.700
0.600
0.500 Trade
0.400
0.300
0.200
0.100
0.000
Utility Income Cloth Wine

8. Point Pair Shows Equilibrium
Income Share, and Utilities of Country 1 and Country 2
Utility  Income Diagram
U 2
U 1
1 1
0 .2 .4 .6 .8 1 Z 1
Z1 is Country 1 Income

9. Previous Equilibria
Income  Utility Diagram
U 2
U 1
1 1
0 .2 .4 .6 .8 1 Z 1

10. More Equilibria
Income  Utility Diagram
U 2
U 1
1 1
Z C
0 .2 .4 .6 .8 1 Z 1

11. Regions of Equilibria and Their
Boundaries
Income  Utility Diagram
U 2
U 1
England Equilibia Boundary
Portugal Equilibia Boundary
1 1
Z C
0 .2 .4 .6 .8 1 Z 1

12. World Equilibria Boundary
World Equilibia
U 2 U 1
World Equilibia Boundary
1 1
Z C
0 .2 .4 .6 .8 1 Z 1

13. Three Important Points
Wine Cloth All Equilibria
U 2 U 1
1 1
Z C
0 .2 .4 .6 .8 1 Z 1

14. 6 Good Model

15. 11 Good Model
11 Industries
U 2 U 1
1 1
Z C
0 .2 .4 .6 .8 1 Z 1