Ricardian Model

10 Key excerpts on "Ricardian Model"

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  Economic Growth with Income and Wealth Distribution

  • W. Zhang(Author)
  • 2006(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  This chapter is concemed with economic deVelopment with economic interactions among multiple countries. Section 8.1 introduces the Ricardian trade theory. In Section 8.2, we review the Heckscher-Ohlin theory. Section 8.3 develops a two- conntry growth model with capital accumulation within the OSG framework. Section 8.4 extends the model of the previous section to the case that the world consists of multiple countries and each country has any number of types of households. Section 8.5 examines interactions of capital and knowledge within a two-country modeling framework. Section 8.6 discusses trade and income and wealth distribution. 8.1 The Ricardian trade theory Adam Smith (1776) held that a country could gain from free trade. He pointed out that if one country has an absolute advantage over the other in one production and the other country has an absolute advantage over the first in another production, both countries gain from trading. But Smith failed to create a convincing economic theory of international trade. It is generally agreed that David Ricardo is the creator of the classical theory of international trade, even though many concrete ideas about trade existed before his Principles. 4 The theories of comparative advantage and the gains from trade are usually connected with his name. The theory of comparative advantage or the theory of comparative costs is one of oldest theories of economics. In this theory the crucial variable used to explain intemational trade patterns is technology. The theory holds that a difference in comparative costs of production is the necessary condition for the existence of intemational trade. But this difference reflects a difference in techniques of production. According to this theory, technological differences between countries determine the international division of labor and consumption and trade pattems. It holds that trade is beneficial to all participating countries.

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  Four Central Theories of the Market Economy

  Conception, evolution and application

  • Farhad Rassekh(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  The Ricardian Model of comparative advantage – built with two countries, two goods, and one factor of production (labor) – is the simplest possible trade model. This raises a question: can this simple model offer insights into the working of international trade in the real world of multi-country, multi-commodity, and multi-factor? As noted above, J. S. Mill's intuition led him to an affirmative answer. But many trade theorists have delved into this question more deeply and their efforts have proven highly fruitful in shedding light on the intricacies of international trade. In fact, the path-dependency of economics in this context is quite palpable as Ricardo's comparative advantage model has spawned numerous theoretical and empirical works. Much of the theoretical research revolves around the generalization of comparative advantage (i.e., whether the Ricardian Model survives under different circumstances) while the empirical investigations generally attempt to determine whether comparative advantage can explain the pattern of international trade.

  As early as 1835, Mountifort Longfield extended the Ricardian comparative advantage to more than two goods.55 He (1835/1971, p. 70) noted,

  Let us suppose the productiveness of English labor to be ten times as great as that of any other nation, in the production of tin, calico, coals, cutlery, and pottery. The wages of her laborers will, in consequence, be much greater than those in any other nation; suppose them eight times as great, and suppose that English labor is only twice as productive as foreign labor, in the manufacture of other commodities. These latter, therefore, will be fabricated in the rest of the world, at the fourth part of the price which it will cost to make them in England.

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  The International Economy

  • Peter B. Kenen(Author)
  • 2000(Publication Date)
  • Cambridge University Press

    (Publisher)

  The Ricardian Model is far too simple to describe precisely the causes and effects of international trade. The main statements made by the model, however, highlight important relationships, and some of them are veri fi able. They can be used to forecast actual trade fl ows, despite the existence of tariffs and other trade barriers. One test of the Ricardian Model was conducted by Robert M. Stern. His work is sum-marized in Table 3-1, which looks at the exports of Great Britain and the United States in 1950, a year for which we have detailed data on productivity (labor requirements) in both countries’ industries. It concentrates on British and American exports to third countries, to avoid distortions introduced by differences in British and American trade barriers. 5 In 1950, output per worker in the United States was much higher than in Great Britain. In other words, labor requirements were much lower. This was true in almost every industry, conferring an absolute advantage on the United States. But wage rates in the United States were about 3.4 times as high as those in Britain, washing out that absolute advantage and allowing each country to exploit its comparative advantage. To show that this was true, we can use the average wage difference between the two countries to classify the 39 industries included in Stern’s study. In 26 industries, output per worker in the United States was less than 3.4 times as high as in Britain. In light of what we have just learned from Figure 3-7, we should expect Britain to have its comparative 5 British exports to the United States are affected by American trade barriers, and American exports to Britain are affected by British barriers. Therefore, the two countries’ bilateral trade is distorted by their trade barriers. British and American exports to France are both affected by French trade barriers, but the effects on the two countries’ exports are more or less uniform.

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  Time Zones, Communications Networks, and International Trade

  • Toru Kikuchi(Author)
  • 2011(Publication Date)
  • Routledge

    (Publisher)

  Part I Preliminaries 2 Basic models of international trade I 2.1 Introduction As Jones (1995, p. 237) emphasizes, one of the most distinguishing characteris- tics of international trade is the “co-existence of markets with overlapping domains.” In other words, while goods are supposed to be traded on international markets, factors are not allowed to move across borders. The latter reflects an important point that the movement of production factors (e.g., labor and capital) is often subject to controls at the border and is generally much less free than the movement of goods. Owing to this special characteristic, links and feedbacks between markets with overlapping domains are major concern in international trade theory. In order to understand these links and feedbacks, let us begin with the analy- sis of international trade using the classic Ricardian Model, which has two goods and one factor (labor). One of the main purposes of this chapter is to explain the impact of international trade opening on national labor markets. To do so, we propose a convincing graphical exposition that emphasizes the role of labor markets. The following section presents the basic Ricardian Model. In section 2.3, utilizing a diagram of the labor market, we propose a new graphical method of decomposing Ricardian trade gains. A Ricardian Model with external economies of scale is presented in section 2.4. A new graphical decomposition method is also applied for the model with external economies of scale in section 2.5. Section 2.6 concludes the chapter. 2.2 Ricardian Model Suppose that there are two countries in the world, Home and Foreign. 1 There is only one factor of production, labor, and the size of each country is measured in terms of labor force size: the total labor force at Home is L and Foreign is L * . 2 In each country, two goods (good 1 and good 2) are produced under constant returns to scale technologies.

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  International Economics

  • Dominick Salvatore(Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  It shows that the higher are U.S. relative labor costs, the lower are its exports in relation to Japan, thus supporting the Ricardian trade model. Source: Adapted from S. S. Golub. Comparative and Absolute Advantage in the Asia-Pacific Region (San Francisco: Federal Reserve Bank of San Francisco, Center for Pacific Basin Monetary and Economic Studies, 1995). p. 46; and S. S. Golub and C. T. Hsieh, “The Classical Ricardian Theory of Comparative Advantage Revisited,” Review of International Economics , May 2000, pp. 221–234; A. Costinot, D. Donaldson, and I. Komunjer, “What Goods Do Countries Trade? A Quantitative Exploration of Ricardo’s Ideas,” Review of Economic Studies , April 2012, pp. 581–608; and William R. Kerr, “Heterogeneous Technology Diffusion and Ricardian Trade Patterns,” NBER Working Paper 19657 , November 2013, pp. 221–234; A. Costinot, D. Donaldson, and I. Komunjer, “What Goods Do Countries Trade? A Quantitative Exploration of Ricardo’s Ideas,” Review of Economic Studies , April 2012, pp. 581–608; and William R. Kerr, “Heterogeneous Technology Diffusion and Ricardian Trade Patterns,” NBER Working Paper 19657 , November 2013; and A. Costinot and D. Donaldson, “Idea, New Insights: The Ricardian Revival in International Trade,” NBER Reporter , No. 3 2017, pp. 1–7. Summary 47 S U M M A R Y 1. This chapter examined the development of trade theory from the mercantilists to Smith, Ricardo, and Haberler and sought to answer two basic questions: (a) What is the basis for and what are the gains from trade? (b) What is the pat-tern of trade? 2. The mercantilists believed that a nation could gain in international trade only at the expense of other nations. As a result, they advocated restrictions on imports, incentives for exports, and strict government regulation of all economic activities. 3. According to Adam Smith, trade is based on abso-lute advantage and benefits both nations.

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  Inframarginal Approach To Trade Theory, An

  • Xiaokai Yang, Wenli Cheng, He-ling Shi(Authors)
  • 2005(Publication Date)
  • World Scientific

    (Publisher)

  Part 3 Exogenous Comparative Advantage: Corner Solutions in the Heckscher-Ohlin and Ricardian Models of Trade CHAPTER 6 AN INFRAMARGINAL ANALYSIS OF THE Ricardian Model* Wen Li Cheng, Jeffrey Sachs b and Xiaokai Yang c * Law and Economics Consulting Group b Harvard University c Harvard and Monash University 1. Introduction Ricardo's theory of comparative advantage (Ricardo, 1817) is regarded as the foundation of modern trade theory. However, the Ricardian Model has not attracted the attention it deserves. This lack of attention is attributable to the fact that the conventional marginal analysis is not applicable to the Ricardian Model, and trade theorists have shown a remarkable insistence on the marginal technique 1 . There have been only a few nonmarginal analyses of the Ricardian Model in the literature. Houthakker (1976) proposed a computational method to calculate the equilibrium pattern of division of labor in a two-country, many-commodity Ricardian Model. Rosen (1978) applied * Reprinted from Review of International Economics, 8 (2), Wen Li Cheng, Jeffrey Sachs, and Xiaokai Yang, An Inframarginal Analysis of the Ricardian Model, 208-20, 2000, with permission from Blackwell. * The authors are grateful to Elhanan Helpman, Lin Zhou, Monchi Lio, Meng-Chung Liu, the referee, and the participants of a seminar at Monash University for helpful comments. Financial support from Australian Research Council Large Grant A79602713 is gratefully acknowledged. We are solely responsible for the remaining errors. Dixit and Norman (1980) noted: The Ricardo model is unsuitable for comparative statics. The phenomenon of multiple output choices with non-differentiable revenue functions makes it difficult to apply most standard techniques of analysis. For analyses which need single valued supply choices, therefore, attention has shifted to a post-Ricardian Model where the factor(s) has diminishing returns in each use.

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  Introduction to International Economics

  • Dominick Salvatore(Author)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  This discussion can easily be extended to any number of countries and commodities. Thus, the conclusions reached on the basis of our simple model with only two nations and two commodities can be generalized and are applicable to the case of many nations and many commodities. SELECTED BIBLIOGRAPHY For a problem-solving approach to the material covered in this chapter, with many examples and solved problems, see: • D. Salvatore, Theory and Problems of International Economics, 4th ed. (New York: McGraw-Hill, 1996), chs. 1, 2 (sects. 2.1 to 2.3). 54 Part One International Trade Theory The preclassical mercantilist view on international trade is found in: • E. F. Heckscher, Mercantilism, Vols. I and II (London: Allen & Unwin, 1935). • P. C. Newman, A. D. Gayer, and M. H. Spencer, Source Readings in Economic Thought (New York: Norton, 1954), pp. 24–53. For Smith’s and Ricardo’s views on international trade, see: • A. Smith, The Wealth of Nations (New York: The Modern Library, 1937), Book I, ch. 3; Book IV, chs. 1–3, 6–8. • D. Ricardo, The Principles of Political Economy and Taxation (Homewood, IL: Irwin, 1963), ch. 7. An excellent exposition of the classical theory of comparative advantage can be found in: • G. Haberler, The Theory of International Trade (London: W. Hodge & Co., 1936), chs. 9–10. • J. Viner, Studies in the Theory of International Trade (New York: Harper & Brothers, 1937), ch. 7. For empirical tests of the Ricardian trade model, see: • G. D. A. MacDougall, ‘‘British and American Exports: A Study Suggested by the Theory of Comparative Costs,’’ Economic Journal, December 1951 Part I: pp. 697–724, and September 1952 Part II: pp. 487–521. • S. S. Golub and C. T. Hsieh, ‘‘The Classical Ricardian Theory of Compar- ative Advantage Revisited,’’ Review of International Economics (May 2000).

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  Advanced International Trade

  Theory and Evidence - Second Edition

  • Robert C. Feenstra(Author)
  • 2015(Publication Date)
  • Princeton University Press

    (Publisher)

  Notice that the home country exports good 1, which is in keeping with its com-parative advantage in the production of that good, / / a a a a  1 1 2 2 ) ) . Thus, trade patterns are determined by comparative advantage, which is a deep insight from the Ricardian Model. This occurs even if one country has an absolute disadvantage in both goods, such as a a  1 1 ) and a a  2 2 ) , so that more labor is needed per unit of production of either good at home than abroad. The reason that it is still possible for the home country to export is that its wages will adjust to reflect its productivities: under free trade, its wages are lower than those abroad. 2 Thus, while trade patterns in the Ricardian Model are determined by comparative advantage , the level of wages across countries is deter-mined by absolute advantage . 1 This occurs if one country is very large. Use figures 1.1 and 1.2 to show that if the home country is very large, then p p a = and the home country does not gain from trade. 2 The home country exports good 1, so wages earned with free trade are / w p a 1 = . Conversely, the foreign country exports good 2 (the numeraire), and so wages earned there are / / w a p a 1  2 1 = ) ) ) , where the inequal-ity follow since / a a p  1 2 ) ) in the equilibrium being considered. Then using a a  1 1 ) , we obtain / w p a 1 = < / p a w  1 ) ) . (L uni2215 a 1 ) uni2215 (L* uni2215 a 2 ) Relative Supply Relativ e Demand p a * p p p a (y 1 + y 1 ) uni2215 (y 2 + y 2 ) * * * Figure 1.2 4 • Chapter 1 TWO-GOOD, TWO-FACTOR MODEL While the Ricardian Model focuses on technology, the Heckscher-Ohlin model, which we study in the next chapter, focuses on factors of production. So we now assume that there are two factor inputs—labor and capital. Restricting our attention to a single country, we will suppose that it produces two goods with the production functions ( , ) y f L K i i i i = , , i 1 2 = , where y i is the output produced using labor L i and capital K i .

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  History of Economic Theory

  • T. Negishi(Author)
  • 2014(Publication Date)
  • North Holland

    (Publisher)

  (Ricardo [41, p. 137].) In other words, the pattern of international specialization and terms of trade between countries remain unchanged, irrespective of whether the gold is a mere luxury good or whether it also plays the role of money. Such a dichotomy clearly exists in Pasinetti's model of a closed Ricardian economy discussed in subsection 2.2, since relative prices in a moneyless real model are independent of the demand equations for luxury goods and they remain unchanged if the role of money is newly assigned to the gold which has been a mere luxury good. Our aim in the following is to consider, by using Pasinetti's model, whether the dichotomy is also possible for the two-country model of the Ricardian theory of international trade where the produce of the labor of 100 Englishmen capital would from year to year have employed. (Ricardo [43, pp. 387-388].) 132 T. Negishi, History of economic theory is exchanged for the produce of 80 Portuguese (Ricardo [41, p. 135]). 12 It will be shown that it is possible only if the Ricardian theory is interpreted as in Negishi [36], so that the capital is imperfectly mobile between countries, an international difference exists, not in the natural wage, but in the rate of profit, and terms of trade can be determined without introducing Mill's reciprocal demands. Suppose the first country is specialized in the production of the first and the third goods (corn and gold) while the second country is specialized in the production of the second good (a manufactured luxury good). Since, unlike in the case of Smith, the possibility of increasing returns is excluded, the specialization is due to the comparative advantage (different production functions) which existed before the international trade.

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  Global Trade Policy

  Questions and Answers

  • Pamela J. Smith(Author)
  • 2013(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  The model also tells us about the distribution of gains from trade within countries. Specifically, the mobile factor (such as labor) gains in terms of its nominal wage rate. However, in real terms, the mobile factor loses in terms of its purchasing power of the good that the country exports, and gains in terms of its pur­chasing power of the good that the country imports. The model also shows gains and losses in the rental rates paid to the specific immobile factors (such as capital and land). That is, those that gain from trade are the owners of a country's abundant immobile factors. Those that lose from trade are the owners of a country's scarce immobile factors.

  These results of the SF model are short-run results. The short run corresponds with the time period when some factors of production cannot be easily moved into use in other industries.

  2.4 Summary Remarks

  This chapter explored inter-industry, inter-firm trade. This trade is two-way trade in dissimilar goods between the national firms of countries. We examined this trade using three traditional trade models: the Ricardian Model, the Heckscher-Ohlin model, and the Specific Factors model. These three models are grounded on the concept of comparative advantage. The law of comparative advantage says that countries will produce and export goods that have a lower relative cost, and therefore price, in autarky. In the Ricardian Model, this comparative advantage arises from differences in technologies across countries. In the Heckscher-Ohlin model, comparative advantage arises from differences in endowments across countries. And, in the Specific Factors model, comparative advantage arises from differences in immobile endowments across countries. The Ricardian and Heckscher-Ohlin models are long-term models because they allow factors of production to move freely across industries. The Specific Factors model is a short-term model because it accounts for the immobility of factors of production across industries. Below, we summarize the key findings from each of these models.

  What are the effects of trade in the long run, when countries differ in technologies?

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