International Trade - Theory and Policy, 2010a

France 6 0 3 8
World Total 24 24 8 8
In order for consumption of both goods to be higher in both countries, trade must occur. In the example,
the United States is consuming five gallons of wine and producing none, so it must import the five gallons
from France. France is consuming six pounds of cheese with no cheese production, so it must import the
six pounds from the United States. The terms of trade is TOT = 5 gals./6 lbs., or 5/6 gals./lb.
Exercise Conclusion
The Ricardian model numerical example assumes that countries differ in their production technologies
such that one of the countries is absolutely more productive than the other in the production of each of
the two goods. If these two countries specialize in their comparative advantage good, then world
production rises for both goods. Increased output occurs even though there is no increase in the amount
of labor input in the world; thus the example demonstrates that specialization can raise world production
efficiency. Because of the increase in output, it is possible to construct a terms of trade between the
countries such that each country consumes more of each good with specialization and trade than was
possible under autarky. Thus both countries can gain from trade. The surprising result of this example is
that a country that is technologically inferior to another in the production of all goods can nevertheless
benefit from trade with that country.
Limitations of the Numerical Example
A numerical example can display only one possible outcome for the model. As such, all conclusions should
be viewed as possibilities rather than general results of the model. With further thought, there are some
problems with the example. First, it is conceivable that with a different choice for the country’s autarky
production and consumption points, world output might not rise for both goods upon specialization. In
this case, we could not be sure that both countries would gain from trade. Second, since we merely made
up a terms of trade that generated the interesting conclusion, we could ask whether a favorable terms of
trade is likely to arise. Is it possible to make up a different terms of trade such that one country enjoys all
the benefits of increased production while the other is made worse off? How can we be sure that this
outcome would not arise? Finally, even if the country has more of both goods after trade, can we be sure
that all consumers would have more of both goods? Perhaps some consumers would have more and
others less.
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