Hi friends, in today’s article we are going to know about the Ricardian theory of international trade or Ricardo comparative cost theory of international trade, assumptions, etc. So let’s discuss in details.
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Ricardian Theory of International Trade
Ricardian theory of international trade is also known as comparative cost advantage theory of international trade. David Ricardo an English economist by criticizing and modifying the classical ideas regarding international trade put forwarded an explanation which is known as comparative cost theory of international trade.
According to comparative cost theory of international trade the basic cause behind the emergency of international trade is not only the difference in absolute cost between countries but also the difference in comparative cost between commodities among various nations.
According to Ricardo different countries of the world are differently endowed with different reasons and technical knowhow.
As a result the one country can produce those commodities and services comparatively at lower cost than the others which are the base suited to its resources structure act to this theory the country will concentrate in the production and export of comparatively lower cost commodities against the import of those commodities whose cost are comparatively higher in domestic country.
Because such type of export import relationship may give rise profit. Thus according to Ricardo the possible profit due to differences in comparative cost leads international trade among various nations of the world.
Assumptions of Ricardian Theory of International Trade
The Ricardo theory of comparative cost can be understood with the help of following assumption –
(i) It is two by two model, there are two countries, say India and England and two commodities say wine and cloth.
(ii) Labour is the only factor of production which is homogeneous in the two countries.
(iii) Price of the commodity depends upon the quantity of labour employed to produce the commodity that is it depends the labour theory of value.
(iv) Production function is subject to constant return to scale.
(v) Factors are perfectly mobile within the country and perfectly immobile between countries.
(vi) International trade is free from any type foreign restriction.
(vii) There is no transport cost.
On the basis of the above assumptions Ricardo said that trade is possible when one country enjoys absolute advantage in the production of both commodity but a comparative advantage in the production of one.
It can be understood with the help of following numerical table as given by Ricardo –
|Commodity Wine (1 Litre)
|Commodity Cloth (1 Mitre)
In above table the cost of production is measured in terms of labour unit. Thus to produce 1 ltr. Wine. India requires 80 labour and to produce 1 mtr cloth it requires 90 labourers.
Similarly England requires 120 men for 1 ltr wine and 100 men for 1 mtr cloth. Thus India has enjoyed absolute advantage in the production of both wine and cloth over England but a comparative advantage in the production of wine over cloth.
According to Ricardo in such a striation India will specialized in the production of wine and export it to England and leave the production of cloth to England for import because thereby both country can earn profit.
If there is no international trade, both India and England would produce both the commodities and domestically exchange. In India one ltre wine will be exchange for (80)=0.88 mtr cloth.
Similarly in England to get one Itre wine 1.2 mtr cloth has to be exchanged now. Let us suppose both the countries have entered into international trade by fixing exchange rate at 1:1. If this is so India will export one Itre wine and in exchange it will get one mtr cloth il (1-0.88)=1.2 mtres more cloth from England than itself.
Similarly England can get one Itre wine by giving (1.2-1)-.20 mtres less cloth to India than doméstic country. That is England’s profit is equal to .20 ltr wine and India’s profit is equal to .12 mtres cloth. According to Ricardo this type of possibility of profit leads international trade.
Ricardian Theory of International Trade Criticism
This theory is criticized by some economists as given under –
• Un realistic assumption of labour Cost – The most severe criticism of the comparative advantage doctrine is that it is based on the labour theory of value. This is highly unrealistic because it is money cost and not labour costs that are the basis of national and international transaction of goods.
• No similar Tastes – The assumption of similar tastes is unrealistic because tastes differs with different income brackets in a country.
• State assumption of fixed Proportions – The theory of comparative costs is based on the assumption that labour is used in the same fixed proportions in the production of all commodities. This is unrealistic and essentially a static analysis.
• Ignores Transport Cost – Ricardo ignores transport costs in determining the comparative advantage in trade. This is highly unrealistic because transport costs play an important role in determining the pattern of world trade.
So friends, this was the concept of Ricardian theory of international trade. Hope you get the full details about it and hope you like this article.
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