International Trade - Theory and Policy, 2010a

2.6 A Ricardian Numerical Example
LEARNING OBJECTIVES
1. Using a numerical example similar to one used by David Ricardo, learn how
specialization in one’s comparative advantage good can raise world productive
efficiency.
2. Learn how both countries can consume more of both goods after trade.
The simplest way to demonstrate that countries can gain from trade in the Ricardian model is by use of a
numerical example. This is how Ricardo presented his argument originally. The example demonstrates
that both countries will gain from trade if they specialize in their comparative advantage good and trade
some of it for the other good. We set up the example so that one country (the United States) has an
absolute advantage in the production of both goods. Ricardo’s surprising result was that a country can
gain from trade even if it is technologically inferior in producing every good. Adam Smith explained in The
Wealth of Nations that trade is advantageous to both countries, but in his example each country had an
absolute advantage in one of the goods. That trade could be advantageous if each country specializes in
the good in which it has the technological edge is not surprising at all.
Suppose the exogenous variables in the two countries take the values in Table 2.7 "Exogenous Variable
Values".
Table 2.7 Exogenous Variable Values
United States aLC = 1 aLW = 2 L = 24
France aLC∗ = 6 aLW∗ = 3 L∗ = 24
where
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