Classical (Ricardian) Model of Trade

Chapter 2 of Feenstra and Taylor Textbook

I. Introduction

A. Mercantilism: 1500-Early 1700’s

B. Adam Smith: Late 1700’s

C. David Ricardo: 1800’s

II. Description of the Classical Model of Trade

A. Two countries, two goods, one factor

B. Relative Value of a Good

C. Factor Details

D. Goods Production

E. Perfect Competition in All Markets

III. The Production Possibilities Frontier

A. Graphics

B. Special Property of the PPF in the Classical Model

C. Slope of the PPF

D. Example

E. Similar Results for Foreign Country

IV. Closed Economy Equilibria (Autarkic Equilibria)

A. Prices and Wages

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B. Outputs

.

V. Absolute Advantage, Comparative Advantage,

and the Pattern of Trade

A. Absolute Advantage

B. Comparative Advantage

.

C. Table 2-2 in Feenstra and Taylor

Table 2.2 Apparel, Textiles, and Wheat in the United States and ChinaFeenstra and Taylor: International Economics, First EditionCopyright © 2008 by Worth Publishers

VI. Open Economy Equilibria (Trading Equilibria)

A. Trading Equilibrium Price Ratio

B. Home Export Supply Function for Wheat

.

C. Foreign Import Demand Function for Wheat

.

D. Goods Market Clearing

E. Real Wages

.

Figure 2.7 Labor Productivity and Wages, 2001Feenstra and Taylor: International Economics, First EditionCopyright © 2008 by Worth Publishers

Figure 2.8 Labor Productivity and Wages over TimeFeenstra and Taylor: International Economics, First EditionCopyright © 2008 by Worth Publishers

F. Outputs

VII. Terms of Trade

A. Definition

B. Changes in the TOT

C. The TOT in this Model

VIII. Example

A. Economy Parameters

B. Autarkic Equilibria

.

C. Trading Equilibrium

.

D. Comparison of Autarky to Trade

IX. Summary

A. Pattern of Trade Determined by Pattern of Comparative

Advantage

B. Pattern of Wages Determined by Pattern of Absolute Ad-

vantage

C. All Individuals Gain from Trade

X. Empirical Evaluation

A. Early Studies

B. Goleb and Hsieh

Review of International Economics (2000)

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