trade theory
Ricardian Trade Theory
By Kiminori Matsuyama1
Abstract: Ricardian Trade Theory takes cross-country technology differences as the basis of trade. By abstracting from the roles of factor endowment and factor intensity differences, which are the primary concerns of Factor Proportions
Theory, Ricardian Trade Theory offers a simple and yet powerful framework within which to examine the effects of country sizes, of technology changes and transfers, and of income distributions. Moreover, its simple production structure makes it relatively easy to allow for many goods and many countries, hence capable of generating valuable insights, which are lost in the standard twocountry, two-sector model of international trade.
Ricardian Trade Theory takes cross-country technology differences as the basis of trade. By abstracting from the roles of cross-country factor endowment differences and cross-industry factor intensity differences, which are the primary concerns of Factor Proportions Theory (such as Heckscher-Ohlin and Specific Factor models), Ricardian Trade Theory offers a simple and yet powerful framework within which to address many positive and normative issues of international trade. It is particularly well-equipped to examine the effects of country sizes, of technology changes and transfers, and income distributions. Furthermore, its simple production structure makes it relatively easy to allow for many tradeable goods and many countries, hence capable of generating valuable insights, which are lost in the standard two-country, two-goods model of international trade.
Let us start with the Ricardian model with a continuum of tradeable goods, adopted from
Dornbusch, Fischer, and Samuelson (DFS) (1977). The world consists of two countries, Home and Foreign. There is a continuum of competitive industries, indexed by z ∈ [0,1], each producing a homogenous tradeable good, also indexed by z. There is only one nontradeable factor of production, called
By Kiminori Matsuyama1
Abstract: Ricardian Trade Theory takes cross-country technology differences as the basis of trade. By abstracting from the roles of factor endowment and factor intensity differences, which are the primary concerns of Factor Proportions
Theory, Ricardian Trade Theory offers a simple and yet powerful framework within which to examine the effects of country sizes, of technology changes and transfers, and of income distributions. Moreover, its simple production structure makes it relatively easy to allow for many goods and many countries, hence capable of generating valuable insights, which are lost in the standard twocountry, two-sector model of international trade.
Ricardian Trade Theory takes cross-country technology differences as the basis of trade. By abstracting from the roles of cross-country factor endowment differences and cross-industry factor intensity differences, which are the primary concerns of Factor Proportions Theory (such as Heckscher-Ohlin and Specific Factor models), Ricardian Trade Theory offers a simple and yet powerful framework within which to address many positive and normative issues of international trade. It is particularly well-equipped to examine the effects of country sizes, of technology changes and transfers, and income distributions. Furthermore, its simple production structure makes it relatively easy to allow for many tradeable goods and many countries, hence capable of generating valuable insights, which are lost in the standard two-country, two-goods model of international trade.
Let us start with the Ricardian model with a continuum of tradeable goods, adopted from
Dornbusch, Fischer, and Samuelson (DFS) (1977). The world consists of two countries, Home and Foreign. There is a continuum of competitive industries, indexed by z ∈ [0,1], each producing a homogenous tradeable good, also indexed by z. There is only one nontradeable factor of production, called
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