International Trade - Theory and Policy, 2010a

2.9 The Motivation for International Trade and
Specialization
LEARNING OBJECTIVES
1. Learn that differences in autarky prices (terms of trade) coupled with the profit-seeking
motive and the absence of transportation costs induce international trade.
2. Learn how the price changes that occur with trade induce specialization.
The Ricardian model can be used to explain Adam Smith’s invisible hand. The invisible hand refers to the
ability of the market, or the market mechanism, to allocate resources to their best possible uses. In the
presentation of the Ricardian model it seems as if one must apply a mathematical formula (comparing
opportunity costs) to identify which country has a comparative advantage and then instruct firms
(perhaps by government decree) as to which goods they ought to produce.
Fortunately, none of this is necessary if the market, or the invisible hand, is allowed to operate. Instead,
firms, or their owners, motivated entirely by profit, would automatically choose the appropriate good to
produce and trade. In so doing, they would be led to maximize the output of goods and satisfy consumer
demands to the extent possible given the limited resources in the economy. In The Wealth of Nations, Adam
Smith said, “[An individual is] led by an invisible hand to promote an end which was no part of his
intention.” [1] Maximizing society’s welfare is not the profit seeker’s intention; instead, he intends only to
do what is best for himself. However, by virtue of the wonders of the market mechanism, everyone is
made better off as well. Here’s how it works in this context.
The Market Motivation to Trade
Suppose two countries, the United States and France, are initially in autarky. Assume the United States
has a comparative advantage in cheese production relative to France. This implies
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