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Trade and Technology: The Ricardian Model - Faculty

Trade and Technology: The Ricardian Model - Faculty

Comparative advantage

Comparative advantage (cont.) International Commercial Policy The Ricardian Model However, this is a statement about possibilities and not about what will actually happen in a decentralized market economy. Will countries actually export the goods in which they have a comparative advantage? Will the potential for mutual gains from trade be realized? To answer these questions, we develop the formal Ricardian model. 12


Setup There are two countries: Home and Foreign. There is one factor of production: labor. The supply of labor is constant in each country. There are two goods: wine and cheese. International Commercial Policy The Ricardian Model Labor productivity varies across countries and goods but does not vary with output (i.e. the technology features constant returns to scale). 13


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