Part I: An Old Favorite: The Ricardian Model

The Ricardian Model is named after David Ricardo, who, in his book, The Principles of Political Economy and Taxation, (1817), discussed the concept of comparative advantage, a concept that has been fundamental for 200 years in the developments in international trade theory. Chapter 1 is taken from the Supplement to Chapter 5 of the third edition of the textbook, World Trade and Payments, (Richard Caves and Ronald Jones). The supplement was based on my 1961 article, “Comparative Advantage and the Theory of Tariffs: A Multi-Commodity, Multi-Country Model,” published in The Review of Economic Studies, June 1961, (and also appears as Chapter 3 in my 1979 book International Trade: Essays in Theory). The chapter begins by mentioning how the famous concept of comparative advantage was originally formulated in a simple model based on the gains from international trade taking place between two countries, each of them capable of producing two commodities, but with the required labor inputs relatively different between the countries. If each country was better at producing one of the commodities but not the other, it seemed obvious to many that international free trade based upon these assumptions clearly would result in benefits to each country. The Ricardian argument that has been so fundamental to trade theory is that such benefits could be shared by both countries even if labor in one country was better in producing both commodities than the other country. The only requirements for such a mutual gain are that each country would export the commodity in which it possessed a comparative advantage and that goods have a global market but labor (the only input in production) has only a national market (i.e., is not mobile between countries so that wage rates can differ between countries)…