International Trade Theory and Policy
by Steven M. Suranovic

Trade 40-1

Ricardian Model Highlights

  • Trade occurs due to differences in production technology.

The Ricardian model is constructed such that the only difference between countries is in their production technologies. All other features are assumed identical across countries. Since trade would occur and be advantageous, the model highlights one of the main reasons why countries trade; namely, differences in technology.

  • Trade is advantageous for everyone in both countries.

Although most models of trade suggest that some people would benefit and some lose from free trade, the Ricardian model shows that everyone could benefit from trade. This can be shown using an aggregate representation of welfare (national indifference curves) or by calculating the change in real wages to workers. However, one of the reasons for this outcome is the simplifying assumption that there is only one factor of production.

  • Even a technologically inferior country can benefit from free trade.

This interesting result was first shown by Ricardo using a simple numerical example. The analysis highlights the importance of producing a country's comparative advantage good rather than its absolute advantage good.

  • A developed country can compete against some low foreign wage industries.

The Ricardian model shows the possibility that an industry in a developed country could compete against an industry in a less developed country even though the LDC industry pays its workers much lower wages.

International Trade Theory and Policy - Chapter 40-1: Last Updated on 8/20/03