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Ricardian Model

1397 Words6 Pages

Name: Imabong Effiong-Akpan
Cohort Group: A (8:30 class)
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Title: Compare and contrast the classical (Ricardian model) and Heckscher-Ohlin (HO) theories of the commodity composition of trade. Discuss the differences in assumptions, post trade production points, and the effects of trade on the distribution of income

The Ricardian Model shows that a developed country can compete against a less developed country which is due to comparative advantage, even though the less developed country pays its workers lower wages. The Heckscher-Ohlin model seeks to explain how countries should operate when resources are not distributed equally around the world.
Assumptions
According to the Ricardian model, the labor theory …show more content…

In the Ricardian model everyone gains form trade which isn’t entirely true in the real world. The both models assume that there is perfect competition, there are no transportation costs, and there are two countries and two goods. The Heckscher-Ohlin model explains trade on the basis of differences in resource endowment whereas the Ricardian model explains trade on the basis of the labor theory of value. The Ricardian assumes that a country produces only the good that it has a comparative advantage in which leads to specialization but this is not the case in the Heckscher-Ohlin …show more content…

Initially, Home is at a no-trade equilibrium at point A with a relative price of cloth at (PC/PF) Autarky. An increase in the relative price of computers to the world price, as illustrated by the steeper world price line, (PC/PF) Trade, shifts in production from point A to point B. At point B, there is a higher output of cloth and a lower output of food. This would cause an increase in the relative price of cloth which shifts the economy-wide relative demand for labor toward the relative demand for labor in the cloth industry. The new relative demand curve would intersect the relative supply curve for labor at a lower relative wage. As a result, the wage relative to the rental falls. The lower wage causes both industries to increase their labor-capital ratios. According to the Stolper-Samuelson theorem, in the long run, when Home opens to trade and faces a higher relative price of cloth, the real rental on capital in Home rises and the real wage in Home falls. In Foreign, the changes in real factor prices are just the reverse. Putting together the Heckscher-Ohlin theorem and the Stolper-Samuelson theorem, we can conclude that a country’s abundant factor gains from the opening of trade (because the relative price of exports goes up), and its scarce factor loses from the openings of trade.
In the Ricardian model, we would consider two goods which are cloth and wine. aLW/aLC < (a* LW)/(a*LC)
The

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