The quantitative importance of transport costs in international trade has been documented by various authors 9. Ricardian model assumptions the modern version of the ricardian model assumes that there are two countries, producing two goods, using one factor of production, usually labor. The ricardian model international trade term paper. Music before we leave this lecture and move on to the financial side of international trade and look particularly at exchange rates in lecture ten. Historically, in as much as the community of nations have had economic interactions, it generally has been dominated by international trade.
Two such models are ricardian and heckscherohlin models. There is a continuum of tradable goods indexed by j. Pdf ricardos numerical example versus ricardian trade. Several different models have been proposed to predict patterns of trade and to analyze the effects of trade policies such as tariffs. Let us start with the ricardian model with a continuum of tradeable goods, adopted from. The ricardian model theory, part i lecture 2 notes pdf 3. While the ricardian model predicts that trade liberalization or tari. The endogenously determined probability of eluding capture depends in part on.
The ricardian model yiqing xie school of economics fudan university sep. It is usually featured in an early chapter of any textbook on international economics. Ricardian differences are relevant for explaining changes in trade patterns over time. That is, if i was already producing somewhere on its ppf and decided to increase production of wheat by one unit, how many units of corn would it have to give up. The socalled ricardian model of comparative advantage, or simply the ricardian trade model, has been a main target in recent publications criticising the mainstream case for free trade.
The ricardian model is a general equilibrium mathematical model of international trade. Its important to point out what in reality can be the very severe real world limitations of the simplified ricardian free trade model. Suppose the technology of the two countries is characterized by the following input requirement table. At home, one worker produces 4 bushels of wheat, so mpl w 4. As james heckman and bo honore 1990 have shown, if general distributions of worker skills are allowed, the roy modeland hence ricardos theory of comparative advantagehas no empirical content. Although the idea of the ricardian model was first presented in the essay on profits a singlecommodity version and then in the principles a multicommodity version by david ricardo, the first mathematical ricardian model was published by william. International trade theory is a subfield of economics which analyzes the patterns of international trade, its origins, and its welfare implications.
There are several models that are used to analyze the dynamics of international trade. In case of country b, the gain from trade amounts to 0. Differences in relative labor productivity across countries give rise to international trade. The model suggests that the countries specialize in producing goods and services that they can do best. In this context, trade would include that portion of the international flow of capital used in its. Curiously, it has now been revealed that ricardos own theory of international trade was different from the ricardian model commonly found in modern textbooks of international economics in.
International trade 4 ricardian model of trade putting the productivity of a single rm as opposed to the one of a country as the center engine of trade. If trade takes place and two countries agree to exchange 1 unit of x for 1 unit of y, the gain from trade for country a amounts to 0. Lecture notes international economics i economics mit. Measuring openness to trade federal reserve bank of st. At the industry level, this provides the foundation for the ricardian model in which relative productivity di erences determine patterns of specialization. Demand plays a crucial role in the determination of international terms of trade in the ricardian model only after opening up of trade. Basic 2 good ricardian model feenstra, chapter 1 continuum of goods dornbush, fischer and samuelson, 1977 heckscherohlin factor endowment model. These panel exercises are closest in spirit to the industrial specialization work of harrigan 1997 and the structural ricardian model of costinot et al. David ricardo ricardian model a country has comparative advantage in producing a good when the countrys opc of producing a good is lower than the opc of producing the good in another country the pattern of trade btwn countries is determined by comp. Other tests of the ricardian model are macdougall 1951.
Paul samuelsons contributions to international economics. Suppose there are two countries, home h, and foreign f. The latter tries to reconstruct ricardos theory with neoclassical tools and assumptions that ricardo did. The first formal models of international trade starts with david ricardo. By ricardian model, of course, they meant a model with only one factor of production for ricardo, that was usually labor, where differences in technology drive comparative advantage. As samuelson 1948 demonstrated, if endowment differences are relatively small between two countries sharing the same technology and facing the same traded. Trade costs also include possible capture of the shipment by thieves.
Thericardian model focuses on comparative advantage and is perhaps the most important concept in international trade theory. The socalled ricardian model of comparative advantage, or simply the r icardian trade model, has be en a main target in recent publications criticising the mainstream case for free trade. Financial choice in a nonricardian model of trade san francisco. Transport costs in a ricardian model with multistage production. David ricardoricardian model a country has comparative advantage in producing a good when the countrys opc of producing a good is lower than the opc of producing the good in another country the pattern of trade btwn countries is determined by comp. Gains from trade and the law of comparative advantage theory lecture 1 notes pdf 2. Ricardian and heckscherohlin models of international trade.
Econometrically speaking, the ricardian model is not nonparametrically identi. Classic trade theory ricardian model technological comparative advantage. The assignment model approach theory lecture 4 notes pdf 5. According to the ricardian model of trade, the demand side conditions come in handy in determining the trade compositions and gains from trade, after trade opens up. Though one of the pillars of the theory of international trade, the extreme predictions of the ricardian model have made it unsuitable for empirical purposes. This most basic model of trade involves two countries, two goods, and one factor of production, labor. These productivity di erences stem from di erences in technology or skills labor productivity. The ricardian model is the simplest and most basic general equilibrium model of international trade that we have. Deardorffs econ 441 problem sets university of michigan. What is the ricardian model of international trade, including.
The model is a general equilibrium model in which all markets i. Gains from trade and the law of comparative advantage. In the heckscherohlin model of trade and unemployment. It is generally believed that, for international trade as a whole, transport costs average around 10% of the value of the good. The modern version of the ricardian model assumes that there are two countries, producing two goods, using one factor of production, usually labor. International trade theory and policy levy economics institute. International trade policy has been highly controversial since the 18th century. Ricardian trade and the impact of domestic competition on. In a model where labour is the only factor of production, differences in technology are represented by differences in. In the basic model, we consider two symmetric coun. Dalton question 1 suppose the united states and mexico are the only countries in the world, and labor is the only productive input. This chapter presents the first formal model of international trade. We consider a world with n countries, where each country has a tradable. Comparative advantage and optimal trade policy cowles.
Ricardos numerical example versus ricardian trade model. We join the new trade theory with a model of choice between bank and bond financing to. A seminal contribution of eaton and kortum 2002 is to demonstrate that random productivity shocks are su. At the beginning of the chapter there is a brief quotation from david ricardo.
Ricardo articulated the principle of comparative advantage. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Historically, it is the earliest model of trade to have appeared in the writings of classical economists, at least among models that are still. We outline the environment of the multicountry ricardian model of trade introduced by ek. The concluding section examines the gains from trade. Free trade and absolute and comparative advantage publish.
The marginal product of labor mpl is the extra output obtained by using one more unit of labor. England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year. International trade and income inequality taiji furusaway hitotsubashi university hideo konishiz boston college october 23, 2016 abstract we propose a simple theory that shows a mechanism through which international trade entails wage and job polarization. The ricardian model provides an introduction to international trade theory. This is in contrast to the hecksherohlin inspired framework developed in.
Empirical support for this model is plentiful and includes contributions by. It is particularly wellequipped to examine the effects of country sizes, of technology changes and transfers, and income distributions. Agents will specialize and trade if the productivitybased gains from trade cover trade costs, including some fixed startup costs. Feenstrataylor, 2017, international trade, macmillan ricardian model the home country we will assume that labor is the only resource used to produce both goods.
It is one of the simplest models, and still, by introducing the principle of comparative advantage, it offers some of the most compelling reasons supporting international trade. Heterogeneous technology diffusion and ricardian trade. The ricardian model the ricardian model focuses on technology differences across countries as an explanation for trade. In this chapter we will examine the following topics. The ricardian model for international trade part 2. International trade theory and economics itself have developed as means to evaluate the effects of trade policies. The ricardian model numerical example assumes that countries differ in their production technologies such that one of the countries is absolutely more productive than the other in the production of each of the two goods. It explains the concept of comparative advantage and why it works as an explanation for trade patterns.
For example the reason why germany export so many cars is that a lot of german rms happen to be superproductive in making cars and so they can sell their cars at a lower price all over the. Thus the comparative costs principle confers gain upon both the countries. Brief summary of reasons to trade and specialize brief history of ricardian model ricardian model. Chapter 2 the ricardian theory of comparative advantage. David ricardos theory of comparative cost advantage economics.