Ricardian Model
David Ricardo constructed the Ricardian Model in the 19th century. Ricardo was opposed to tariffs and other restrictions on international trade so he developed the idea of comparative advantage. Comparative advantage is "the ability to produce a good at a lower cost, relative to other goods, compared to another country." According to Ricardo, with perfect competition and undistorted markets, countries tend to export goods in which they have a comparative advantage.Important Ricardian Model Ideas
Trade occurs due to differences in production technology- Ricardo constructed his model assuming the only difference between two countries is their production technology. Countries trade because of differences in technology.Trade is advantageous for everyone in both countries- Ricardian model shows that everyone can benefit from trade. This is assuming that there is only one factor of production.
Even a technologically inferior country can benefit from free trade-
A developed country can compete against some low foreign wage industries.
Heckscher-Ohlin Model
The Heckscher-Ohlin Model is a "general equilibrium mathematical model of international trade. It was developed by Eli Heckscher and Bertil Ohlin to build on Ricardo's theory of comparative advantage by predicting patterns of trade based on factor endowments of a region. Factor endowments are the amount of land, labor, capital, and entrepreneur ship that a country possesses and can exploit for manufacturing. The Heckscher-Ohlin model says that countries will export products that are abundant while importing products that are scarce. Relative endowments of the factors of production determine a country's comparative advantage. Countries have comparative advantages with the goods that are abundant in their nations.Gravity Model
The gravity model estimates the pattern of international trade. It consists of factors of geography and distance but can be used to test other economic theories of trade.
3 comments:
Are any of these models practiced in world trade today (or were they back in WW2)? Also, how is it that trade benefits everyone involved? Doesn't the buyer lose something?
Well Areeb, first they were made back before WW2 and are still used today yet i didn't write anything about that because we're only supposed to do up to WW2 right? Secondly (if that is even a word)The buyer gains something in return, for example you don't just walk around handing people your candy do you, you expect something in return.
What do you think is the best compromise between competition and production, because obviously (according to these models) producing products at lower costs is beneficial to the seller. However, how does this affect other countries that would import these goods? P.S. Do you know what the rankings are for richest country in the world? I don't know why that's relevant, I'm just curious. Who exports the most?
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