International Trade Theory and Policy
The theory of International Trade shows the movement of trade between countries. Using the Ricardian model, the theory explains that when two countries produce goods that they are effective in producing, the two countries can both gain from trade. The implication of the Ricardian model in the international trade scenario is that trade can be of advantage to all the countries involved only if each country produces goods in accordance with their comparative advantage. The rationale behind the model is that in case one country is not good in the production of a given product, it can trade the product it produces with another country. In this case each of the countries produces a product that is required but not produced by the other country.
The key assumption in the application of the Ricardian model is that labor is the only factor of production. The labor is also assumed to be similar within a single country and mobile across countries. Another assumption in the model application is that only two products are produced for the countries to exchange. With this assumption, the implication is clearly that not monetary terms are used since a barter trade occurs. Other assumptions include perfect competition between the two countries, free entry and exit into the market, and existence of a general equilibrium of supply and demand for goods.
The involvement of the two countries is based on the belief that through the sale of products via exportation, the countries gain revenue which can then be used to pay workers. The countries use comparative advantage as the basis for deciding which goods to produce and sell. The production costs are also considered to help the company reduce the traveling costs that are to be incurred.
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