Ricardian Model of International Trade - Assignment Example

1. The provisions of the “Ricardian” model of international trade allow economists to acknowledge the significance of technological factors in permitting the acquisition of maximum benefit from the activity of trade (Feenstra 1). Accordingly, this notion is explored in terms of the comparative advantage that is possessed by each country in the production of a specific commodity. As an economic framework which assists the launch of further explorations and studies in the sphere of international trade and its outcomes, the assumptions of the “Ricardian” model primarily rest on the presence of two nations, whereby, one country is identified as the ‘home’ while, the other is categorized as ‘foreign’. Moreover, the production of these two countries suggests the presence of two goods or commodities as another underlying assumption. Apart from the identified output, the input used to produce this output is single such that the input of labor is characterized by an inelastic supply in addition with the possession of a homogenous attributes. The model also assumes the absence of any restrictions on the occurrence of trade and the possession of technological factors in each nation is said to remain varied. Lastly, the model assumes that competitive forces in all markets are perfect. The gains from trade under this framework can be understood with regard to the opportunity cost, whereby, a country possessing a lower opportunity cost in the production of a commodity is said to be more efficient and has the ability to capture gains because of this factor in relative terms. 2. The foundation of the “Heckscher-Ohlin Model” is linked with the assessing the activity of trade with regard to the notion of the availability of resources (Feenstra 31). While, examining the “Heckscher-Ohlin Model” and comparing it with the recommendations of “Ricardian” understandings it is evident that the former aims to reject the significance of technology as a factor in international trade which has been highlighted by the latter. Henceforth, the key assumption of the “Heckscher-Ohlin Model” states that the endowment of factors of each country is more important than their state of technology as a differentiating factor in the activity of international trade. Secondly, the model also identifies that it is possible to establish differentiations regarding various commodities as per the inputs and factors of production that are required to produce them. Accordingly, on the basis of the assumptions that have been outlined previously the “Heckscher-Ohlin Model” defines patterns of trade by basing this decision on the quantity of factors of production that is possessed by each nation. For example, if country X possesses an abundant resource of Y then this model would postulate that X should engage in the production of Y. On the other hand, the concept of factor price equalization suggests that as wage and rate differentials began to impact economic activity the assumptions of the model would lead towards a possible scarcity situation. This aspect has both short run and long run impacts because in the former scenario the nation would wish to enhance reliance on the export segment of the economy. 3. Analysis of economic patterns and trends substantiates the claim that when a small country imposes a regulation on trade such as a tariff, the burden of this action is largely experienced by the nation which has imposed this act (Tokarick 5). This principle is defined under the provisions of the general equilibrium and how it operates with reference to the incidence of tariff burden. The outcomes of tariff imposition by a small country can be examined in terms of the effect upon the efficiency of resource allocation in the economy and the whether this activity can be deemed as responsible for lowering the benefits that are experienced by consumers in that country. The impact of tariff imposition can be examined in two terms, for example, if governmental tariffs are placed on certain products in an economy local suppliers experience a rise in their ability to enjoy the benefits of this action. This notion states that tariff imposition increases the competitiveness of local manufacturers as they can benefit from higher prices that are being offered by their competition. However, this fact only stands true for scenarios where the tariff has been imposed upon competing commodities, for instance, if local manufacturers are purchasing certain raw materials from abroad and a tariff charge is levied on these commodities then this would emerge as a issue for consumers because they would not benefit from competitive offerings of goods and other commodities. In this case other alternatives such as the imposition of a quota or offering subsidies to local suppliers would appear to be more feasible and viable. 4. The arguments against free trade can be categorized under various economic perspectives which essentially define how economic theorists who belong to each classification or school of thought may debate that free trade is in fact a doctrine that must not be practiced (Dunkley 225). Arguments against free trade which can be attributed to those who follow a rather orthodox outlook forward the notion of how trade activities can pose harm to both the environmental and economic wellbeing of a country. The former in this regard can be explained through the concept of externalities while, the latter is linked with defining the role of free trade in obstructing the development of local industries and escalating a reliance upon foreign goods and services. As noted by Dunkley each of the arguments raised by opponents of free trades have been debated by individuals who deem the occurrence of trade activities as favorable and desirable for an economy’s future progress (225). For example, the concept of externalities and the impact of trade on the environment is countered by accepting and recommending policies to eliminate the extent of pollution or damage which is caused by such kind of economic activity. However, with reference to the argument regarding local industries which are still passing through the early stages of their development, proponents of free trade often refuse to accept the true extent of this activity. 5. Issues of trade with less developed countries and also since the inception of the GATT have been characterized by the dispute between the distribution of resources and the establishment of policies and terms to define the course of action for initiating trading activities. As noted by Reyes, the stance of less developed nations especially since the mid-20th century has been to call for a revival in the practices within international trade to accommodate the progress of the said nations (213). Similarly, the nature of the economic setup of less developed nations also paves way for dispute that is linked with their core areas of specialization. For example, the production in less developed nations is primarily rooted and concentrated within the primary sector of production while, it has been recognized that the manufacturing sector must be enhanced and improved to increase prospects for development. In these circumstances the issues with trade and economic development are directed towards the effective and efficient utilization of factors of production, the management of labor and the implementation of measures to reduce costs and expenses. According to Reyes tremendous prospects which lie in the realm of research and development, innovation and technology are critical towards directing less developed economies towards a path of progress (214). This move calls for greater cooperation on the part of developed nations to grant infant economies with the required infrastructure to establish themselves in the meanwhile it is also fundamental to ensure that this assistance and aid is utilized in the most transparent manner possible by launching accountability frameworks and mechanisms. 6. The consequences of free trade and the imposition of the same relates with the launch of two respective outcomes that essentially hold competing consequences and impacts. As suggested by Carbaugh, this activity is led by the effects of custom unions and the outcomes or the manner in which each concept reacts decides the total extent of benefits and advantages that are received by the members (268). In the case of trade creation, imports of that are priced less take over in the place of the production which was previously being conducted by the custom union (Carbaugh 268). By applying the provisions of the “Ricardian” model and the understanding of comparative advantage it can be deduced that this activity leads to the emergence of positive outcomes because of a rise in production.However, in trade diversion the activity is opposed by the replacement of lower priced goods at the hands of a supplier who prices goods within a higher range but belongs to the respective union (Carbaugh 268). Within the European Union (EU) and amongst its member states the movement of free trade implies the removal of any barriers to operate the activity successfully across states. This allows for the movement of commodities and the flow of capital in a seamless manner without the intervention of hindrances to do so. Moreover, this notion also establishes that member states are encouraged to grant assistance to each other so as to maintain the strength and preserve the economic prosperity of the union. Works Cited Carbaugh, Robert J. International Economics. Cambridge, Mass: Winthrop Publishers, 1980. Dunkley, Graham. Free Trade: Myths, Realities and Alternatives. Zed Books, 2004. Feenstra, Robert C. Advanced international trade: theory and evidence. Princeton University Press, 2003. Reyes, Giovanni. "INTERNATIONAL TRADE CONDITIONS: CHALLENGES FOR LESS DEVELOPED COUNTRIES." Revista Tendencias 13.1 (2013). Tokarick, Stephen. What Do We Know About Tariff Incidence?Washington D.C.: International Monetary Fund, 2004. Read More