Chapter 3 : The Ricardian Model of International Trade
Antoine Berthou antoine.berthou@sciences-po.org Sciences Po

Introduction

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

Models based 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 and T-shirts) Prices of these goods in autarky, in the two countries : Computer 1,000 1,500 T-shirt 10 10

A B

Relative price of the two goods in the two countries : PA = PB =
PC ,A PT ,A PC ,B PT ,B

= 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 get more 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

Relative