Abstract
This chapter presents the standard Ricardian trade theory. It introduces the reader to the 2 × 2 model (two countries, two goods, one factor of production) and shows the effects of trade liberalization on the pattern of trade, production and wages. The extension from two to many goods (2 × N model) allows for an introduction of transportation costs as a basis to study the co-existence of internationally traded and nontraded goods as well as so-called Dutch-Disease effects. With, finally, the extension from many to very many goods (i.e., to a continuum of goods), the reader is introduced to the Dornbusch-Fischer-Samuelson (1977) model that is widely used in international trade theory.
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Notes
- 1.
All variables for the foreign country are denoted by an asterisk (*) throughout the chapter.
- 2.
The slope can also be found by solving Eq. (4.1) for y 2 and differentiating y 2 with respect to y 1. Or, as a special case, we simply divide L/a L2 (dy 2) by L/a L1 (dy 1).
- 3.
Thus, the optimal production point on the PPF in autarky could be determined by introducing preferences of the consumers in a country. The representative consumer would choose a consumption bundle where an indifference curve is tangent to the PPF: The opportunity costs of producing the two goods equal the willingness of consumers to marginally substitute the two goods (i.e., the marginal rate of substitution). See, e.g., Caves, Frankel, and Jones (2007, Chaps. 2 and 4).
- 4.
Suppose the demand side of the economy is specified and thus determined in form of indifference curves. We would easily find out that a higher indifference curve can be reached in each country with international trade if relative prices differ from the countries’ opportunity costs.
- 5.
See also Chap. 6 in this book.
- 6.
- 7.
The figure is adapted from Caves, Frankel, and Jones (2007, p. 67).
- 8.
An alternative condition would be to require balanced trade.
- 9.
If transportation costs are, however, good-specific and possibly large, the ranking of the goods in (4.16) may not be relevant anymore regarding the distinction between traded and nontraded goods. In this case we would have to re-order the goods in the chain of decreasing relative costs, taking into account the different transportation costs. Also note that Sanyal and Jones (1982), in their paper “Trade in Middle Products” present a model, in which all goods which are “consumed” are nontraded. These goods differ, however, regarding the share of the domestic added value.
- 10.
An analogous effect would arise if, alternatively, the price of good 2 increased accordingly. The notion of the “Dutch Disease” goes back to the rapid development of the natural gas sector in the Netherlands which squeezed other traditional export sectors of the Dutch economy. Other examples are the (sometimes) booming oil industries in Norway, Great Britain or in the Canadian Province of Alberta which typically results in a burden on other export industries. The “Dutch Disease effect” has thus become a generic effect in (Ricardian) trade theory that emphasizes the fact that industries in a country do compete for domestic factors of production such as labor.
- 11.
This is the so-called Balassa-Samuelson effect and may partly explain why in some countries as Switzerland or the Scandinavian countries prices are considered to be pretty high.
References
Caves, R. E., Frankel, J. A., & Jones, R. W. (2007). World trade and payments. An introduction (10th ed.). Boston: Pearson.
Dornbusch, R., Fischer, S., & Samuelson, P. A. (1977). Comparative advantage, trade, and payments in a Ricardian model with a continuum of goods. The American Economic Review, 67(5), 823–839.
Feenstra, R. C. (2016). Advanced international trade (2nd ed.). Princeton, NJ: Princeton University Press.
Krugman, P., Obstfeld, M., & Melitz, M. J. (2015). International economics. Theory and policy (10th ed.). Boston: Pearson.
Samuelson, P. A. (1954). The transfer problem and the transport costs, II: Analysis of effects of trade impediments. The Economic Journal, 64(254), 264–289.
Sanyal, K. K., & Jones, R. W. (1982). The theory of trade in middle products. American Economic Review, 72(1), 16–31.
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Appendix
Appendix
Please note that, in the following Fig. 4.7, g < 1 reflects iceberg transportation costs due to Samuelson (1954): For each unit of a good, z, only the fraction g arrives. This implies that A(z)>w/w* is not a sufficient condition for a good to be exported by the home country as 1/g > 1 of transportation costs have to be taken into account in Home’s “total” unit costs: wa(z)1/g. This implies the new adjusted A(z)g and A(z)/g curves, respectively. For a given equilibrium relative wage rate \( \left(\overset{\sim }{\frac{w}{w^{\ast }}}\right) \), the home country will export those goods for which A(z)g > \( \left(\overset{\sim }{\frac{w}{w^{\ast }}}\right) \) and the foreign country those for which A(z)/g < \( \left(\overset{\sim }{\frac{w}{w^{\ast }}}\right) \). Therefore, the goods “in the middle”, i.e. goods \( z\in \left[{\overset{\sim }{z}}_H,{\overset{\sim }{z}}_F\right] \), remain nontraded.
The Ricardian model with a continuum of goods and transportation costs. Source: Own figure in analogy to Dornbusch, Fischer, and Samuelson (1977, p. 830)
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Weder, R. (2017). The Standard Ricardian Trade Model. In: Jones, R., Weder, R. (eds) 200 Years of Ricardian Trade Theory. Springer, Cham. https://doi.org/10.1007/978-3-319-60606-4_4
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