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by Steven Suranovic ©1997-2004

Trade 40-7a 

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The Ricardian model represents a barter economy. Even though we define prices and wages in money terms, all relevant solutions in the model are described in ratio terms in which the money or dollars cancel out. Never will we solve explicitly for the dollar price of wine or cheese or the dollar wage rate.

Thus a good way to think about how the model works is to imagine that workers go to work in their respective industries and produce wine or cheese. At the end of the day they are paid, not in dollars, but in goods. The cheese workers wage is a quantity of cheese. The wine workers earn a quantity of wine. Since workers, as consumers presumably will desire some wine and some cheese for their evening dinner they must first go to a market to trade some of their wages (goods) for some of the other goods available at the market.

In autarky cheese workers and wine workers come together on the domestic market to trade their goods. The autarky price ratio or terms of trade represents the amount of wine that exchanges per unit of cheese on the domestic barter market.


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International Trade Theory and Policy Lecture Notes:
©1997-2004 Steven M. Suranovic
Last Updated on 8/20/03