A Simplistic View: The Ricardian Model of Trade

“By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar power bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and bind together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world (David Ricardo).” David Ricardo’s Model of Trade attempts to personify this quote by assessing the arrangement and profit of international trade in terms of comparative advantage. Though exceedingly one-dimensional in its suppositions, the model allows for a better understanding of the concept of globalization.

David Ricardo constructed several elements that made his model on free trade plausible and beneficial for all actors involved. The first element is that differences in technologies are necessary for the commencement of free trade. His model is designed in a manner that indicates the existence of a singular difference between two countries, that of their production technologies. Second, his model suggests that both countries get advantageous gain from free trade. However, the assumption that there is only one factor of production results in this said outcome. Third, the model implies that a technologically inferior country can benefit from free trade. Ron Rogowski illustrated an example of this by using the free trade of computers and shoes between the United States and Brazil. In his scenario, any American worker compared to a Brazilian worker could produce more computers (50:5 ratio) and shoes (200:175 ratio), granting the United States with the absolute advantage good. By practicing free trade, each country improves opportunity cost by specializing production of their comparative advantage good. In this case, Brazil would put forth all labor toward shoes and the United States toward computers and each could consequently increase their production possibility for both products. This analysis emphasizes the importance of producing a country's comparative advantage good, rather than its absolute advantage good. Coasting on with the concept of comparative advantage good, it allows Ricardo to dictate a possibility that low foreign wage industries can compete against a developed country’s industry. Last, Ricardo emphasizes the key requirement that the trading countries establish a binding terms of trade contract. All of these concepts contributed to the idealistic view of free trade that Ricardo believed in and boasted.

Nevertheless, the Ricardian Model contains misleading assumptions of his views on free trade and its proficiency. One is the assumption that there are two participating actors, producing two goods, and using only one production input, labor. Also, it requires the ideological state of balance in which all markets (i.e. goods and factors) are perfectly competitive. The model further implies that there are no transportation costs for goods shipped between the two countries. What’s more, the goods and labor produced are assumed to be uniform across countries and firms within an industry. Finally, full employment of labor is also assumed. Consumers (the laborers) are assumed to maximize product effectiveness with an income constraint. These assumptions validate the fact that the model’s simplicity is detrimental to its productiveness, especially when applied to modern free trade.

Despite its simplistic theory, the Ricardian Model