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Chapter 3 : The Ricardian Model of International Trade
Antoine Berthou

Sciences Po


Why do countries open to international trade ? Which countries benefit from international trade ? What is the nature of the gain ? And how do gains are shared ? Traditional theories of international trade provide some answers to these questions

Modelsbased on differences between countries 2 main models with different assumptions Ricardian model of trade (David Ricardo) : countries have different technologies Heckscher Ohlin Samuelson (HOS) : countries have different factor endowments (labor, capital, human capital...) All these differences result in different terms of trade (relative prices) in autarky ⇒ These differences motivate international trade Terms of trade drives international exchange Terms of trade = price of exports relative to price of imports Variations of terms of trade affect welfare in Home country : ⇒ ↑ terms of trade enables ↑ imports for a given amount of products exported Free trade will be prefered if it improves the terms of trade & (economic) welfare

Example : 2 countries (A and B) and 2 goods (Computers andT-shirts) Prices of these goods in autarky, in the two countries : Computer 1,000 1,500 T-shirt 10 10


Relative price of the two goods in the two countries : PA = PB =

= 100 in country A = 150 in country B

PA < PB : in autarky, the relative price of computers is higher in country B than in country A Producers of computers in A : selling goods in B enables to getmore t-shirts Producers of t-shirts in B : selling goods in A enables to get more computers In trade models : specialization and free trade allows each country to improve its terms of trade ⇒ Free trade increases welfare for each country

Terms of trade in free trade : Terms of trade in each country converge to terms of trade in free trade, common to both countries : PA < PFT < PB

Relativeprice of computers


Pft Free trade Free trade


⇒ No trade is possible if this is not the case

Summary : Motivation for free trade in trade models Differences between autarky prices across countries Specialization and free trade increases welfare The larger the difference between autarky price and free trade price, the larger the gain ⇒ Think of small countries openning up to tradeTraditional trade theories predict that smaller countries gain more from the free trade Similar countries do not gain from free trade ⇒ Ex. Does not explain trade between European countries

I. Ricardo : origins of comparative advantage
In the Ricardian model of trade Trade is based on differences (as in HOS) These differences arise because countries have different production technologiesProduction costs differ across countries... and therefore prices As compared to Smith, countries with an absolute disadvantage in the production of all goods will gain in free trade Specialization and trade will result from international differences in opportunity costs for the production of the two goods.

Relative productions and opportunity cost Example : Country in the North imports flowers from theSouth The North can produce 10 million flowers a year Resources used for this production could be used to produce 100,000 computers The opportunity cost of producing 10 million roses is 100,000 computers. If the South can only produce 30,000 computers with these resources The opportunity cost of producing computers is lower in the North The opportunity cost of producing flowers is lower in the South If North stops the production of roses and specializes in the production of computers, production changes : Millions of roses -10 +10 0 Thousands of computers +100 -30 +70

North South Total

⇒ Specialization on most efficient productions can increase the availability of goods at the world level

The gains of free trade have two components : The gains of specialization : Scarce...
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