Labor Productivity and Comparative
Advantage: The Ricardian Model
Countries engage in international trade for two basic reasons, each of which
contributes to their gains from trade. First, countries trade because they are
different from each other. Nations, like individuals, can benefit from their
differences by reaching an arrangement in which each does the things it does
relatively well. Second, countries trade to achieve economies of scale in
production. That is, if each country produces only a limited range of goods, it can
produce each of these goods at a larger scale and hence more efficiently than if
it tried to produce everything. In the real world, patterns of international trade
reflect the interaction of both these motives. As a first step toward understanding
the causes and effects of trade, however, it is useful to look at simplified models
in which only one of these motives is present.
The next four chapters develop tools to help us to understand how differences
between countries give rise to trade between them and why this trade is mutually
beneficial. The essential concept in this analysis is that of comparative advantage.
Although comparative advantage is a simple concept, experience shows that it
is a surprisingly hard concept for many people to understand (or accept). Indeed,
the late Paul Samuelson—the Nobel laureate economist who did much to develop
the models of international trade discussed in Chapters 4 and 5—once described
comparative advantage as the best example he knows of an economic principle
that is undeniably true yet not obvious to intelligent people.
In this chapter we begin with a general introduction to the concept of comparative
advantage, then proceed to develop a specific model of how comparative
advantage determines the pattern of international trade.
LEARNING GOALS
After reading this chapter, you will be able to:
• Explain how the Ricardian model, the most basic model of international
trade, works and how it illustrates the principle of comparative advantage.
• Demonstrate gains from trade and refute common fallacies about international
trade.
• Describe the empirical evidence that wages reflect productivity and that
trade patterns reflect relative productivity.
Advantage: The Ricardian Model
Countries engage in international trade for two basic reasons, each of which
contributes to their gains from trade. First, countries trade because they are
different from each other. Nations, like individuals, can benefit from their
differences by reaching an arrangement in which each does the things it does
relatively well. Second, countries trade to achieve economies of scale in
production. That is, if each country produces only a limited range of goods, it can
produce each of these goods at a larger scale and hence more efficiently than if
it tried to produce everything. In the real world, patterns of international trade
reflect the interaction of both these motives. As a first step toward understanding
the causes and effects of trade, however, it is useful to look at simplified models
in which only one of these motives is present.
The next four chapters develop tools to help us to understand how differences
between countries give rise to trade between them and why this trade is mutually
beneficial. The essential concept in this analysis is that of comparative advantage.
Although comparative advantage is a simple concept, experience shows that it
is a surprisingly hard concept for many people to understand (or accept). Indeed,
the late Paul Samuelson—the Nobel laureate economist who did much to develop
the models of international trade discussed in Chapters 4 and 5—once described
comparative advantage as the best example he knows of an economic principle
that is undeniably true yet not obvious to intelligent people.
In this chapter we begin with a general introduction to the concept of comparative
advantage, then proceed to develop a specific model of how comparative
advantage determines the pattern of international trade.
LEARNING GOALS
After reading this chapter, you will be able to:
• Explain how the Ricardian model, the most basic model of international
trade, works and how it illustrates the principle of comparative advantage.
• Demonstrate gains from trade and refute common fallacies about international
trade.
• Describe the empirical evidence that wages reflect productivity and that
trade patterns reflect relative productivity.
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