Difference between revisions of "Ricardian Model of Trade"
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The Ricardian Model of Trade is developed by English political economist David Ricardo in his magnum opus ''On the Principles of Political Economy and Taxation''(1817). It is the first formal model of international trade. Before Ricardo, the benefit of has already been propounded by Adam Smith. Ricardo strengthens the case for free trade by giving it a theoretical framework based on the logic of comparative advantage. This concept is of such historical importance in the field of economics that when Nobel laureate Paul Samuelson was once questioned by a self-important mathematician to "name one proposition in all of the social sciences which is both true and non-trivial, he responded confidently, "comparative advantage." | The Ricardian Model of Trade is developed by English political economist David Ricardo in his magnum opus ''On the Principles of Political Economy and Taxation''(1817). It is the first formal model of international trade. Before Ricardo, the benefit of has already been propounded by Adam Smith. Ricardo strengthens the case for free trade by giving it a theoretical framework based on the logic of comparative advantage. This concept is of such historical importance in the field of economics that when Nobel laureate Paul Samuelson was once questioned by a self-important mathematician to "name one proposition in all of the social sciences which is both true and non-trivial, he responded confidently, "comparative advantage." | ||
| − | ( | + | Like all other economic theories, the Ricardian Model makes a number of basic assumptions to construct an imaginary world. |
| + | 1. There are only 2 countries, Home and Foreign | ||
| + | 2. They produce 2 goods, X and Y | ||
| + | 3. Production requires only 1 input, labor, which is limited in amount in both countries and is perfectly immobile (i.e. strict border control). | ||
| + | 4. opportunity cost between the goods is constant in each country. (Graphically, the production possibility frontier is a straight line.) | ||
| + | 5. There is neither transaction cost nor transportation cost | ||
| + | |||
| + | By definition, a country has absolute advantage over the other if it is more efficient at producing both goods than the other country. A country has comparative advantage in a certain good if the opportunity cost of producing that good is lower than in the other country. Ricardo observes that an absolute advantage does not necessarily imply a comparative advantage. | ||
| + | |||
| + | Under autarky condition (no trade), each of the two countries produces some combination of the 2 goods. The relative price ratios in these countries are | ||
Revision as of 23:05, 24 September 2010
The Ricardian Model of Trade is developed by English political economist David Ricardo in his magnum opus On the Principles of Political Economy and Taxation(1817). It is the first formal model of international trade. Before Ricardo, the benefit of has already been propounded by Adam Smith. Ricardo strengthens the case for free trade by giving it a theoretical framework based on the logic of comparative advantage. This concept is of such historical importance in the field of economics that when Nobel laureate Paul Samuelson was once questioned by a self-important mathematician to "name one proposition in all of the social sciences which is both true and non-trivial, he responded confidently, "comparative advantage."
Like all other economic theories, the Ricardian Model makes a number of basic assumptions to construct an imaginary world. 1. There are only 2 countries, Home and Foreign 2. They produce 2 goods, X and Y 3. Production requires only 1 input, labor, which is limited in amount in both countries and is perfectly immobile (i.e. strict border control). 4. opportunity cost between the goods is constant in each country. (Graphically, the production possibility frontier is a straight line.) 5. There is neither transaction cost nor transportation cost
By definition, a country has absolute advantage over the other if it is more efficient at producing both goods than the other country. A country has comparative advantage in a certain good if the opportunity cost of producing that good is lower than in the other country. Ricardo observes that an absolute advantage does not necessarily imply a comparative advantage.
Under autarky condition (no trade), each of the two countries produces some combination of the 2 goods. The relative price ratios in these countries are
