The Ricardian model is a simple picture of international trade between nations, which was created to show comparative advantage in producing goods and the gain from trade. The concept of comparative advantage was introduced by David Ricardo in 19th century. The country has comparative advantage in producing certain product if it can produce it at a lower cost than any other country. The Ricardian model has been developed on following assumptions:
* Only two countries are involved in activities;
* Only two goods can be produced;
* Labor is the only factor of production.
The Ricardian model is a useful key for economy, because it explains why trade between countries can happen ...view middle of the document...
He also identified that wage rates in manufacturing sector was twice greater in US than in Britain. Thus, the US should be dominant exporter in markets where labor productivity in this country is higher than in Britain, and likewise in Britain where goods from dominant sector should be exported. By analyzing these facts, we expect export shares of the two countries to be roughly equal in third world markets (“International Trade Relations”, 2014).
The Ricardian model was also verified by Robert Stern, who compared US and Britain in 1950 and 1959. He found out that the average wage in US was 3.4 times greater than in Britain; therefore, the US export should exceed in those sectors where labor productivity is 3.4 or greater. The prediction of Ricardian model was confirmed in 33 of 39 sectors in 1950 (Stern, 1962).
The Hungarian economist Bela Balassa has confirmed these findings in 1963.
More recent evidence on the Ricardian model has been less clear-cut. By focusing on specialization, international trade is growing. In the real world economy, countries do not focus on producing goods for which they at a comparative disadvantage, thus there is no possible way to measure their labor productivity in these sectors. For instance, not all the countries have capacity to...