The Ricardian model focuses on comparative advantage and is perhaps the most important concept in international trade theory. In a Ricardian model, countries specialize in producing what they produce best. Unlike other models, the Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods. Also, the Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country. The main merit of Ricardin model is that it assumes technology differences between countries.[citation needed Technology gap is easily included in the Ricardian and Ricardo-Sraffa model (See the next subsection).
The Ricardian model makes the following assumptions:
Labor is the only primary input to production (labor is considered to be the ultimate source of value).
Constant Marginal Product of Labor (MPL) (Labor productivity is constant, constant returns to scale, and simple technology.)
Limited amount of labor in the economy
Labor is perfectly mobile among sectors but not internationally.
Perfect competition (price-takers).
The Ricardian model measures in the short-run, therefore technology differs internationally. This supports the fact that countries follow their comparative advantage and allows for specialization.
Modern development of the Ricardian model
The Ricardian trade model was studied by Graham, Jones, McKenzie and others. All the theories excluded intermediate goods, or traded input goods such as materials and capital goods. McKenzie(1954), Jones(1961) and Samuelson(2001)emphasized that considerable gains from trade would be lost once intermediate goods were excluded from trade. In a famous comment McKenzie (1954, p.179) pointed that "A moment's consideration will convince one that Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England."
Recently, the theory was extended to the case that includes traded intermediates. Thus the "labor only" assumption (#1 above) was removed from the theory. Thus the new Ricardian theory, or the Ricardo-Sraffa model, as it is sometimes named, theoretically includes capital goods such as machines and materials, which are traded across countries. In the time of global trade, this assumption is much more realistic than the Heckscher-Ohlin model, which assumes that capital is fixed inside the country and does not move internationally.
The Ricardian model makes the following assumptions:
Labor is the only primary input to production (labor is considered to be the ultimate source of value).
Constant Marginal Product of Labor (MPL) (Labor productivity is constant, constant returns to scale, and simple technology.)
Limited amount of labor in the economy
Labor is perfectly mobile among sectors but not internationally.
Perfect competition (price-takers).
The Ricardian model measures in the short-run, therefore technology differs internationally. This supports the fact that countries follow their comparative advantage and allows for specialization.
Modern development of the Ricardian model
The Ricardian trade model was studied by Graham, Jones, McKenzie and others. All the theories excluded intermediate goods, or traded input goods such as materials and capital goods. McKenzie(1954), Jones(1961) and Samuelson(2001)emphasized that considerable gains from trade would be lost once intermediate goods were excluded from trade. In a famous comment McKenzie (1954, p.179) pointed that "A moment's consideration will convince one that Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England."
Recently, the theory was extended to the case that includes traded intermediates. Thus the "labor only" assumption (#1 above) was removed from the theory. Thus the new Ricardian theory, or the Ricardo-Sraffa model, as it is sometimes named, theoretically includes capital goods such as machines and materials, which are traded across countries. In the time of global trade, this assumption is much more realistic than the Heckscher-Ohlin model, which assumes that capital is fixed inside the country and does not move internationally.
