Ricardian model

Ricardian model: The Simple Ricardian Model

Ricardian model: Extensions of the Simple Ricardian Model

Ricardian model: The Role of the Ricardian Model in Understanding the World Economy

The Ricardian model is the simplest and most basic general equilibriummodel of international trade that we have. It is usually featured in an early chapter of any textbook on international economics. Historically, it is the earliestmodel of trade to have appeared in thewritings of classical economists, at least among models that are still considered useful today.

It is indeed still useful. In spiteofbeing superseded over the years bymodelswithmuchmore complexity (more factors of production, increasing returns to scale, imperfect competition), the Ricardian model often provides the platform for the introduction of today’s new ideas. Dornbusch, Fischer, and Samuelson (1977) examined a continuumof goods first in a Ricardian model. Eaton and Kortum (2002) incorporated an ingenious and elegant treatment of geography into a Ricardian model. Melitz (2003) started a small revolution in trade theory by modeling heterogeneous firms within what was essentially a Ricardian model.

The Ricardian model itself, as a new idea, came many years after Ricardo. According to Ruffin (2002), in 1816 David Ricardo introduced only a portion of the model that now bears his name, focusing primarily on the amounts of labor used to produce traded goods and, from that, the concept of comparative advantage. The first appearance of the Ricardian model, according to Ruffin again, was in Mill (1844).

See also absolute advantage; comparative advantage; gravity models; Heckscher-Ohlin model; New Trade Theory; specific-factors model

FURTHER READING

• Collins, Susan M. 1985. ‘‘Technical Progress in a Three Country Ricardian Model with a Continuum of Goods.’’ Journal of International Economics 19 (1 2): 171 79. Shows in a Ricardian model that technical progress in one country can hurt another whose exports are close substitutes for the first.
•  Deardorff, Alan V. 2001. ‘‘Fragmentation in Simple Trade Models.’’ North American Journal of Economics and Fi nance 12 (2): 121 37. Examines the splitting of pro duction processes across countries in a Ricardian model. 
• Dornbusch, Rudiger, Stanley Fischer, and Paul A. Sam uelson. 1977. ‘‘Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods.’’AmericanEconomic Review67 (5): 823 39.The seminal paper extending the Ricardian model to an in finite number of goods, with additional extensions to include transport costs, tariffs, money, and exchange rates. 
• Eaton, Jonathan, and Samuel Kortum. 2002. ‘‘Technology, Geography, and Trade.’’ Econometrica 70 (5): 1741 79. Uses randomized technologies to extend the Ricardian model to multiple countries and a continuum of goods; rich with both theoretical implications and empirical applications.
•  Hicks, John R. 1953. ‘‘An Inaugural Lecture.’’ Oxford Economic Papers 5 (2): 117 35. Includes a classic treat ment of the effects of technological progress in a Ri cardian model. 
• Jones, Ronald W. 1961. ‘‘Comparative Advantage and the Theory ofTariffs:AMulti Country,Multi Commodity Model.’’ Review of Economic Studies 28 (3): 161 75. Extends the predictions of comparative advantage to a model with multiple (but finite numbers of) goods and countries. 
• Melitz, Marc J. 2003. ‘‘The Impact of Trade on Intra industry Reallocations and Aggregate Industry Pro ductivity.’’ Econometrica 71 (6): 1695 25. Seminal paper modeling heterogeneous firms in a one factor trade model. 
• Mill, John Stuart. 1844. ‘‘Of the Laws of Interchange be tween Nations; and the Distribution of the Gains of Commerce among the Countries of the Commercial World.’’ Essays on Some Unsettled Questions of Political Economy. London: John W. Parker. Classic treatment of international trade that includes the first full specifica tion of the Ricardian model.
•  Ruffin, Roy J. 2002. ‘‘David Ricardo’s Discovery of Com parative Advantage.’’ History of Political Economy 34 (4): 727 48. Documents the process by which David Ri cardo discovered the idea of comparative advantage, including his thinking that anticipated much of modern trade theory. 
• Stern, Robert M. 1962. ‘‘British andAmerican Productivity and Comparative Costs in International Trade.’’ Oxford Economic Papers 14 (3): 275 96. A classic empirical test of the Ricardian model.
•  Wilson, Charles A. 1980. ‘‘On the General Structure of Ricardian Models with a Continuum of Goods.’’ Econ ometrica 48 (7): 1675 1702. Extends the Dornbusch Fischer Samuelson model to multiple countries. 

ALAN V. DEARDORFF