A simple rendition of the Ricardian model of trade.

1. Ricardian
model
jhuato.sfc@gmail.com

2. Goals
 Understand the Ricardian model of trade,
in which trade is based on technological
differences

3. Ricardian model
 Two goods: wine and cheese
 Two countries: H and F (*)
 MRTs are different for each country
 MRTs are constant (linear PPFs)
 Markets are competitive
 One productive resource: Labor[+]
 Labor is fixed in each country: cannot be exported
 Comparison between autarky (no trade) and trade
 Indifference curves are given but not explicitly drawn
[+] All produced or producible productive wealth can be
viewed as “stored” labor. Thus, given natural resources, labor
can be viewed as the sole resource.

4. Ricardian model
In textbooks, the equation of the PPF for H is presented as
follows:
L = aLC xC + aLW xW
where aLC is the amount of labor required to produce one
unit of cheese, xC the amount of cheese produced, aLW
the amount of labor required to produce one unit of wine,
and xW the amount of wine produced.
The PPF equation for F will be similar but the variables will
have an asterisk (*). The a’s are called the “labor
requirements.”

5. Example
Consider these two PPF equations:
100 = 2 xC + 4 xW
120 = 3 x*C + 3 x*W
Rearranging:
xW = 25 – 0.5 xC
x*W = 40 – x*C
which we’re more familiar with…
This is to show you that you can always go (easily)
from the textbook form of these equations to the
form we learned in class.

6. PPFs

7. Autarky

8. Trade

9. Trade
Autarky Autarky Trade Trade
Cheese Wine Chees Wine
e
Output H 18 16 50 0
Output F 20 20 0 40
Output World 38 36 50 40
Consumption H 18 16 25 18
Consumption F 20 20 25 22
Consumption World 38 36 50 40

10. Trade

11. Some points
 All is required for trade is CA. As long as the MRTs
are not equal, the countries have a basis for
trading.
 With equal MRTs, the basis for trade cannot be
technology, i.e. resource requirement differences.
(They may still trade on the basis of preference
differences.)
 Without full employment, the model does not hold
any longer as the MRTs are undefined.
 It highlights an important source of trade.
Empirically: economists need to go and measure
the effect of these difference in technology (MRTs)
on observable trade. Results are mixed.