A Simplistic View: the Ricardian Model of Trade

Topics: Economics, International trade, Comparative advantage Pages: 3 (877 words) Published: December 14, 2006
"By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar power bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and bind together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world (David Ricardo)." David Ricardo's Model of Trade attempts to personify this quote by assessing the arrangement and profit of international trade in terms of comparative advantage. Though exceedingly one-dimensional in its suppositions, the model allows for a better understanding of the concept of globalization. David Ricardo constructed several elements that made his model on free trade plausible and beneficial for all actors involved. The first element is that differences in technologies are necessary for the commencement of free trade. His model is designed in a manner that indicates the existence of a singular difference between two countries, that of their production technologies. Second, his model suggests that both countries get advantageous gain from free trade. However, the assumption that there is only one factor of production results in this said outcome. Third, the model implies that a technologically inferior country can benefit from free trade. Ron Rogowski illustrated an example of this by using the free trade of computers and shoes between the United States and Brazil. In his scenario, any American worker compared to a Brazilian worker could produce more computers (50:5 ratio) and shoes (200:175 ratio), granting the United States with the absolute advantage good. By practicing free trade, each country improves opportunity cost by specializing production of their comparative advantage good. In this case, Brazil would put forth all labor toward shoes and the United States toward computers and each could consequently increase their production possibility for both...
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