The Ricardian Trade Model - Assignment Example

Ricardian Trade Theoretical foundations of comparative advantage in a world with two countries, two goods, and one factor The Ricardian Trade Model was developed by David Ricardo to explain international trade basing on comparative advantage and specialization by countries (Winthrop, 1344). Assuming the labor costs for producing cotton and Wine are as depicted in the table below for England and Portugal, Portugal has absolute advantage in cloth and wine production, but in cloth production England has comparative advantage.

Labor cost Per Unit Commodities In the Ricardian model, since wine is less costly to produce compared to cotton in Portugal it specializes in the production of wine than is then traded for cloth, which if produced locally would be more expensive. On the same basis, England specializes in the production of cloth and imports wine according to the Ricardian model. The amount of wine produced from specialization in Portugal and the free movement of workers to the wine producing industry increases compared to an autarky situation.

Cloth production by England also augments due to increased workers and specialization allowing for the fall in prices for both countries. This leads to an increase in the consumption ability of the people in both countries. Trade, therefore, can occur despite one country having absolute advantage in the production of both goods due to the presence of comparative advantage in the production of one good over another. Assumptions of the Ricardian Model include the assumption of perfect competition where there is perfect information, free entry and exit by firms, homogenous output among firms, firms cannot influence output and prices, and the aim of the firms are to maximize profits (Winthrop, 1344).

The other assumptions are that there are two goods produced by two countries using one factor of production (labor) that is homogenous and freely moves between industries and that there is full employment. Other assumptions are general equilibrium, industry production of the goods and services, resource constraint and its immobility across countries, and lack of transportation costs for goods and services across countries (Winthrop, 1344). The structure of the Ricardian model is that a country that has comparative advantage in the production of a good specializes in the production of the good for domestic consumption and export while importing the good that it has comparative disadvantage in its production.

The other country will specialize in the production of the second good for its domestic consumption and export the extra to the first country getting the supplies of the first good through imports. This results in benefit including increased specialization between the two countries, and welfare improvements among other benefits as enumerated later in the paper in the results of Ricardian model section. The predictions of the Ricardian model include that the price of the good in which a country has comparative advantage will rise while that in which it has comparative disadvantage will fall owing to trade between the two countries.

The model also predicts a specialization by the country in the production of the good to which it has comparative advantage leading to the movement of workers to this industry. However, the assumptions of free labor mobility and full employment ensure all the workers from the industry where the country lacks comparative advantage are employed. The other prediction inherent in the model is that there will be an augmentation of the individual and national welfare in both countries due to the availability of lower prices and more choices for the consumers under free trade.

Real wages of workers in the counties involved in free trade are also predicted to increase in the Ricardian model allowing them to purchase more goods and services under free trade. Work Cited Winthrop, Jones., Grossman, Gene, Rogoff, Kenneth, and Kenen, Peter. Handbook of International Economics. Amsterdam: Elsevier, 1995. Print.