3_Chapter3.pdf - Chapter 3 The Ricardian Model Econ 178 Introduction • There are 2 broad groups of theories to explain the pattern of international

3_Chapter3.pdf - Chapter 3 The Ricardian Model Econ 178...

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Chapter 3: The Ricardian Model Econ 178
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Introduction There are 2 broad groups of theories to explain the pattern of international trade (mentioned in course introduction): 1. Differences in labor, physical capital, natural resources, and technology create productive advantages for countries (our focus) 2. Economies of scale, first mover advantage, and imperfect competition can create productive advantages for countries (we’ll touch on it)
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Motivation We’ve shown that free trade increases overall welfare because consumers gain more than producers lose In this chapter, Show how trade arises when differences in price are caused by differences in “technology” (another word for productivity) Propose a simple model of trade with one input where everyone wins from trade – requires some restrictive assumptions In later chapters, alter the assumptions to show how losses can occur
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The Ricardian Model David Ricardo published Principles of Political Economy and Taxation in 1817. Mercantilists argue to accumulate precious metals -> Export! Adam Smith (1776) said countries can benefit from trade if they are productive (absolute advantage) Ricardo says that it’s relative productivity that determines trade benefits (comparative advantage) get rid of tariffs! Ricardian Model explains how differences in labor productivity affect the patterns of international trade.
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Ricardian Model Assumptions 1. Labor (L) is the only factor of production 2. Labor productivity varies across countries due to differences in technology, but labor productivity within each country is constant 3. The amount of labor in each country is fixed and everyone works (full employment)
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