Legacy of the Ricardian model

Résumé du document

David Ricardo, born in 1772, was a prominent British intellectual. During his 51 years of life, Ricardo became one of the most influential economists of the 19th century, worked as a stock-trader, a businessman, a financier and a speculator, became rich when he had been disowned by his father for having married a non-Jewish woman, and even managed to be elected as a Member of Parliament. Ricardo's first encounter with economics was with the discovery of Smith's The Wealth of Nations. He wrote his first article, The High Price of Bullion, a Proof of the Depreciation of Bank Notes, at the age of 39. He introduces his theories on International Trade in his most famous work, the 1817 book On the Principles of Political Economy and Taxation.

These theories form what is today called the "Ricardian model".
The Ricardian model, or, as some economists also call it, the Ricardo-Haberler model, is considered by many economists, including Nobel-prize winner Paul Krugman, as the "simplest model" to explain why countries benefit from trade. Yet the model introduces a concept that is not always self-explanatory: the concept of comparative advantage.

Indeed, many economists and intellectuals (and even presidential candidate Ross Perot) often fail to make the difference between absolute advantage and comparative advantage. We can easily imagine a model with a country more productive than another country in two goods, and yet have the less productive country have a comparative advantage because it is cheaper in terms of the first country's own labor to produce one product rather than the other.

Extraits

[...] The last major criticism made to the Ricardian model is brought to us by Korean economist Ha-Joon Chang. Mr. Chang proved to be a virulent critic of the comparative advantage principle as a whole, on the basis that it may have been the principle used by developed countries to keep their advantage over developing countries. In 2002, with his book Kicking Away the Ladder, Chang elaborated a very bold theory: according to him, even the most libertarian countries like the United States and the United Kingdom have used specific policies such as interventionism and protectionism in order to enrich themselves, while forbidding other countries to do the same. [...]

[...] The first to tackle the task was Piero Sraffa, the editor of the Collected Works of David Ricardo. Sraffa's work on Ricardo's model led to the creation of a “neo-Ricardian” school, which shows the legacy that Ricardo's work still has on the world of economics. It is however Mr. Deardorff's works that we will study here. Indeed, in 2004 with his article “Local comparative advantage: Trade costs and the Pattern of Trade” Alan V. Deardorff introduces a new variable in the model. [...]

[...] Thus, if countries are not fully specialized like we saw in the first part, evidence shows that, logically, countries do often trade products for which they have a comparative advantage. Moreover, accordingly to the Ricardian model, a country that has an absolute advantage in all products over another country will still engage in trade and benefit from it. A final example of research on empirical evidence of the Ricardian model is the research led by Kozo Kiyota in 2011. In his article test of the law of comparative advantage, revisited”, Mr. [...]

[...] Even before trying to conceive new theories, some authors saw fit to try and find empirical evidence of the Ricardian model and of comparative advantage. The most obvious consequence of this trend is the elaboration in 1965 by Hungarian economist Bela Balassa of the Balassa index, which indicates if a country has a comparative advantage in the production of a given product or not. This index is widely used today in statistics on international trade it is for example found on every Intracen statistics page on a country's trade performance. [...]

[...] and Zhang Jing, “Welfare Impact of European Integration”, Economic Policy October 2012 - MacDougall G. D. A., “British and American Exports: A Study Suggested by the Theory of Comparative Costs”, The Economic Journal, Vol No (Sep., 1952), pp. 487-521 - Minondo Asier, “Does comparative advantage explain countries' diversification Review of World Economics (2011) 147:507–526 - Morrow Peter M., “Ricardian–Heckscher–Ohlin comparative advantage: Theory and evidence”, Journal of International Economics 82 (2010) 137–151 - Panaik Utsa, "Ricardo's Fallacy/ Mutual Benefit from Trade Based on Comparative Costs and Specialization?" Jomo K.S. [...]