Ricardian trade theory



 Ricardian trade theory which was developed by David Ricardo revolves around specialization and comparative advantage.
 According to this theory a country can produce and consume a given amount of goods.
 The model assumes that there are two countries that produce two goods.
 The production of the aforementioned two goods is achieved by use of one factor of production. This factor of production that is used in production of the two goods is usually labor.
 The market in which the goods are traded is perfectly competitive meaning that consumers have perfect knowledge with regard to the cost of labor.
 Since the market is perfectly competitive, then the goods traded in the markets across different countries are homogeneous.
 The goods can be moved or transported from one country to another at no cost. This implies that there are no transportation costs to be incurred in ferrying goods from one country to another.
 Labor is homogenous within a given country. Therefore, labor is mobile and can move from one industry to another within a country.
 Labor is not mobile across nations since it has different productivities in various countries.
 The principal of comparative advantage and specialization which is advocated by the nations requires countries to only produce goods and services that are in their favor.
 Country has to foregone production of a certain good in order on concentrate on production of a good that is cheaper for it to produce.
 The country produces more units than it can consume and exports the extra units to other nations.
 Equally, the nation has to import the good that it has foregone its production. It has to import from the other country that has a comparative advantage when it comes to the production of the good.
 International trade is based on the principle of comparative advantage and specialization. Thus countries have to channel their resources and energy in production of goods that cost them less while import those that cost them more to produce.
 To illustrate this model we can take two countries country one and country two.
 The two countries produces pens and spoons and use the same amount of time to manufacture or produce a unit of the two goods, a pen and a spoon.
 As demonstrated in the table, country one has the ability of producing four pens at the expense of 1 spoon. It can also produce ¼ of a spoon at the expense of 1 pen.
 Country two can also produce 2 pens at the expense of ½ of a spoon. Similarly, it can produce ½ a spoon at the expense of 1 pen.
 Country one has comparative advantage when it comes to production of pens while country two has comparative advantage in producing spoons.
 Country one has to specialize in producing pens that it has comparative advantage and exporting extra pens to country two. On the other side, country two has to specialize in producing spoons which it has comparative advantage and exports some spoons to country 1.
 Let’s take the case of Kenya and Japan.
 The two countries export industrial goods in the case of Japan and agricultural goods in the case of Kenya.
 The cost of producing agricultural products such as coffee and tea is lower in Kenya due to favorable climate.
 Japan has comparative advantage in producing industrial goods such as machines and vehicles.
 Thus, Kenya specializes in producing agricultural products which it exports to Japan while Japan specializes in producing industrial goods which it exports to Kenya.
 As seen in the scenario of Kenya and Japan, comparative advantage and specialization creates international trade.