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Ricardian trade model

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Ricardian trade model

Present the Ricardian trade model. Consider three points:
-Briefly summarize the model.
-Present and discuss a (hypothetical) numerical example of comparative advantage for the two country two good one factor case.
-Summarize the empirical evidence.
here is a link to the book:
http://www.economia.unam.mx/cedrus/descargas/InternacionalEconomics.pdf
starting in page 24 chapter 3

Ricardian Trade Model

The act of trading has taken various twist and turns with researchers developing theories to explain the various concepts of trading. International trading is one such trading platform that has received contribution from economists with a variety of theories explaining how the markets function. International is the exchange of goods, service between various nations. Its functionality relies on the level of cohesion between different countries and the level input they are willing to bring forth to promote the trade. Were it not for international trading, every country would have to produce only those products it would use at a certain time. One such theories that explains the function of international trading is the Ricardian trade theory.

            According to Krugman, Maurice, and Marc (23) David Ricardo created his theory with the aim of explaining the concept of comparative advantage and the level of specialisation. He presupposed that whenever a nation is producing certain products, it would be essential to focus on those products that make it feasible to actualise the production equation. This would mean the nation would focus on those aspects that best suits its specialisation. A notable example is on instance where different nations produce goods that are completely different, yet these goods are useful between these two nations. In such an instance, the nation would produce those goods that are easy and feasible for it to produce. The theory also sees that even if a nation has an advantage in producing a variety of products, there are instance when it is much feasible for other nations to produce those products. Either way, Ricardo saw an opportunity for nations to depend on one another.

In the case of two countries that hopes to trade in the international market, say England and Portugal. Both of these countries are capable of producing wine and clothing. However, it is much more feasible for Portugal to produce wine while it is feasible for England to produce clothing. Even if one country were to produce the two products at the same time, which is what Ricardo noted as absolute advantage, the other country would probably have an advantage in producing only one of the products hence having the better opportunity cost of producing that commodity (Krugman, Maurice and Marc 30). It would be cheaper for both countries to share the resources they have and would make economic sense to produce commodities at the lowest cost.

In as far as the model is useful in making accurate prediction on international trade models, there are instances when it makes wrong predictions (Krugman, Maurice and Marc 23). On assumptions, the theory claims that each of the countries has its level of specialization while the trade that both of these countries make is beneficial. The model also assumes that each of the country differences in resources causes the countries, while in essence some countries trade good to gain services. This act of trading acts the same way as in instances of businesses trading to earn profits. If the same case were to be realistically analysed, some countries would have an absolute advantage over others in almost all the sectors, which means such countries trade with the aim of gain much more than better goods.

Ricardian trade theory just as other theories has its fair share of assumption that fails to answer some logic questions that arise. Still, this does not make the theory fail to highlight the importance of international trading. The theory also shows the economic sense of nations trading internationals hence sharing some of the products that other nations would probably not produce.

 



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