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A New Construction of Ricardian Trade Theory—A Many-country, Many-commodity Case with Intermediate Goods and Choice of Production Techniques—

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Abstract

Ricardian trade theory is one of the most famous theories of economics but appears to have been little developed. Many attempts were made to extend the theory to multi-country, multi-commodity cases, but none succeeded to construct a general theory that included intermediate goods. A need to include intermediate goods within the theory was evident, but hurdles to introduce intermediate inputs were high. Intermediate goods change the entire structure of analysis; when they are traded, the price of a good is dependent of the prices of imported inputs. Consequently, prices should be determined simultaneously for prices of all countries. The present paper has succeeded in overcoming these difficulties and describes how wages, prices and productions are related. It analyzes the M-country, N-commodity case with choice of techniques and trade of intermediate goods in general terms, thus presenting a new basis for international trade theory. New light was shed on topics like gains and losses from trade, international wage rate discrepancies, and price and quantity adjustments. On a theoretical plane, the new construction eliminates a traditional weakness of the Ricardian theory. The traditional Ricardian theory acknowledged labor as the only input and excluded capital in any form. The new theory, presented here, analyzes capital goods as traded intermediate inputs.

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Shiozawa, Y. A New Construction of Ricardian Trade Theory—A Many-country, Many-commodity Case with Intermediate Goods and Choice of Production Techniques—. Evolut Inst Econ Rev 3, 141–187 (2007). https://doi.org/10.14441/eier.3.141

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