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Ricardian Theory

The document discusses the Ricardian Model of Trade, which explains why countries engage in trade based on differences in technology and factor endowments. It highlights the assumptions and implications of the model, including the importance of free trade and resource allocation according to comparative advantage. Additionally, it addresses the limitations of the Revealed Comparative Advantage (RCA) metric in capturing trade competitiveness and suggests data sources for further exploration.

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8 views11 pages

Ricardian Theory

The document discusses the Ricardian Model of Trade, which explains why countries engage in trade based on differences in technology and factor endowments. It highlights the assumptions and implications of the model, including the importance of free trade and resource allocation according to comparative advantage. Additionally, it addresses the limitations of the Revealed Comparative Advantage (RCA) metric in capturing trade competitiveness and suggests data sources for further exploration.

Uploaded by

ohmydianxiahualian
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INTERNATIONAL TRADE

The Ricardian Model of Trade

Course Instructor:
Dr. Devasmita Jena
Why do countries trade?
❖ Trade theories try to explain: Why do countries trade? What determines the
trade flow between countries?
• Differences in technology – Ricardian Theory of Comparative Advantage
• Differences in endowments of factors – Heckscher-Ohlin Theory
• Differences in both technology and endowments – Specific Factors Model
• Product Differentiation– Krugman Model and extensions
• Firms matter – Melitz Theory and beyond
Ricardian Theory: The Set up and Assumptions
•
Autarky Equilibrium
•
Arriving at Trade Equilibrium
•
Free Trade Equilibrium
•
Ricardian Theory: Results
•
Ricardian Theory: Wage Determination
•
Ricardian Theory: Assumptions Vs. Implications
❖ Skepticism: Assumptions are unrealistic and hardly hold in real life
❖ Intuition: According to the Ricardian theory, to maximize the total o/p of the
world:
• Resources have to be fully employed across countries
• Within countries, resources have to be allocated to each industries as per
comparative advantage
• Free Trade
Ricardian Theory: Empirics
•
RCA: Data Sources, Issues and Studies
❖ While RCA reflects changes in an economy’s relative factor endowment and productivity, it
cannot distinguish improvements in factor endowments or trade policy effects
❖ National measures, such as tariffs, non-tariff measures, subsidies and others, affecting
competitiveness are not captured in the RCA metric
❖ RCA many a times erroneously gives higher value to a country with smaller size, even if that
country’s comparative advantage in a given item is same as another country (Ben Shepherd,
2021)
❖ Nonetheless, RCA is widely used measure
• You can use it too, just be mindful of idiosyncrasies
❖ Source:
• World Integrated Trade Solutions(WITS), World Bank
• UNCTADstats
❖ Interesting papers that you might want to look at (optional, but no harm in taking sneak peek!):
• Batra and Khan (2005)
• Burange and Chaddha(2008)
• Andhale and Kannan (2015)

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