Assuming the provisions of Ricardian model of international trade (case of many goods), pick a statement which best explains why on flat sections of RD-RS chart shifts in specialization are common.

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BlackTom AI · Accepted Answer

To begin, we need to interpret the question: in a Ricardian model with many goods, why do flat (horizontal) sections on the RD-RS chart correspond to common shifts in specialization?
Option: 'Because on these sections we observe a particular threshold level of home economy relative wage getting over of which would mean that it’s no more beneficial to produce the good domestically.'
First, recall what RD and RS represent: RD is the relative demand for labor across goods, and RS is the relative supply of labor across goods. On flat sections of the RD–RS curve, the relative reward (or wage) for producing a particular good is effectively constant as you move along the axis, which means the opportunity cost in terms of other goods does not change.
This implies that within that wage band, the comparative advantage for producing that good does not rotate into favoring domestically produced output versus imported output; the economy can reallocate (shift) specialization without any change in price incentives, because the relative profitability of substituting one good for another remains unchanged.
Now evaluating the given statement:
- The core claim is that there exists a threshold level of the home country’s relative wage, beyond which producing the good domestically ceases to be beneficial. This aligns with the idea of a wage band along which a flat RD–RS segment persists: as long as the home wage is within that band, domestic production remains competitive, but if the wage moves beyond the threshold, the cost advantage flips and specialization adjusts—hence a shift.
- The statement correctly identifies a boundary concept: specialization changes when relative wages cross a threshold that alters the cost-benefit calculus of producing domestically versus exporting or importing.
- However, some common misunderstandings could arise: one might think shifts on flat sections occur for any wage change, but in fact shifts occur specifically when the relative wage crosses the limiting levels that define the flat segment. And flat segments do not imply that production is always unprofitable; they imply that within the band, changes in the economy’s size or resources do not alter the relative profitability of producing that good domestically.
- The reasoning also hinges on the Ricardian premise that only technology (tech differences across goods) drives comparative advantage, so changes in wages reflecting opportunity costs can trigger rerouting of specialization when thresholds are crossed, which is consistent with why shifts occur on flat segments.
- In contrast, if the wage stays inside the threshold band, specialization remains stable and no further shifts are prompted; if it crosses the threshold, the favorable industry changes, causing a shift in which goods the country specializes in.
- Finally, this option captures the intuitive mechanism behind flat sections: threshold-like wage levels determine when domestic production remains advantageous, and crossing those boundaries leads to reallocation of resources and shifts in specialization, which is exactly what happens along flat portions of the RD–RS chart.

econ_420_120255_249094 Midterm Exam 1

Assuming the provisions of Ricardian model of international trade (case of many goods), pick a statement which best explains why on flat sections of RD-RS chart shifts in specialization are common.

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