The Ricardian Model
In international trade, comparative advantage serves as a crucial element in understanding the viability of business engagements. In understanding comparative advantage, the principal in the theory is presented as counterintuitive, but it is often confused with absolute advantage whose principle is intuitive. To understand the comparative advantage theory, mathematical expressions, figures, and numerals are used in its representation. Ricardian model was designed to elaborate this theory of comparative advantage exhaustively. This paper studies the critical aspects of the Ricardian model.
Basically, the Ricardian model explain the likelihood of industries in developed and less developed countries (LDC) to engage in competition despite the low wage bill for industries in LDC. In this model, assumptions are made of two countries manufacturing two products. The common aspect of their production is labor. The labor is considered as one factor. In his model, products and factors are competitive at equilibrium. Produced goods are uniform and it is costless to transport these goods across these two countries. Labor is also uniform in the two countries, but technological differences lead to variation productivity. In addition, labor is only free to move within the country work at their best with only the limitation of wages.
The Ricardian model makes some market predictions that are practical while others are not. The prediction on exaggerated specialization is not practical because it has never been observed. The other prediction in the model is that the income gains enjoyed by one country will remain unchanged. In practice, such a prediction is not sustainable because business interaction with other countries influences the salary distribution with the other country. The already confirmed prediction evident in the model is that of export of products, which are of high production.
Figure 3-3 on supply and demand is unique in shape. The key to fully understanding it lies in the curve, Relative Supply curve (RS) and the Relative Demand curve (RD). The world prices decline to below the indicated marks aLC/aLW would be read as there being no cheese for supply. For instance, if a kilogram cheese is produced in six hours and three hours for a liter of wine in a country. In the other country, the cheese takes two hours and the wine one-hour to produce. The ratio of cheese production cost to wine is 1:2. This means that the flat part of RS equals ½ on the price axis. In the case of the first country, substitution happens with variation in demand. This substitution occurs along the RS.
In conclusion, the Ricardian model has successfully captured and represented the concept of comparative advantage. The model is of the view that a developed country and an LDC can compete businesswise despite the advantage in LDC due to low labor cost. The model attempts to elaborate comparative advantage using two countries with two different products, but with a single common factor of labor. In the structure of this model, there are assumptions, such as perfect competitiveness, uniform labor, and costless transportation of goods across countries and restriction of labor to a given county. While it may be unlike to encounter such scenarios in real life, they help put the idea in context. Ricardian model is explained further using a supply and demand chart on cheese and wine production. The model successfully explains the comparative advantage concept.