Essay on Ricardian trade Example | Topics and Well Written Essays - 500 words

On Ricardian trade - Essay Example On the same basis, England specializes in the production of cloth and imports wine according to the Ricardian model. The amount of wine produced from specialization in Portugal and the free movement of workers to the wine producing industry increases compared to an autarky situation. Cloth production by England also augments due to increased workers and specialization allowing for the fall in prices for both countries. This leads to an increase in the consumption ability of the people in both countries. Trade, therefore, can occur despite one country having absolute advantage in the production of both goods due to the presence of comparative advantage in the production of one good over another. Assumptions of the Ricardian Model include the assumption of perfect competition where there is perfect information, free entry and exit by firms, homogenous output among firms, firms cannot influence output and prices, and the aim of the firms are to maximize profits (Winthrop, 1344). The other assumptions are that there are two goods produced by two countries using one factor of production (labor) that is homogenous and freely moves between industries and that there is full employment. Other assumptions are general equilibrium, industry production of the goods and services, resource constraint and its immobility across countries, and lack of transportation costs for goods and services across countries (Winthrop, 1344). The structure of the Ricardian model is that a country that has comparative advantage in the production of a good specializes in the production of the good for domestic consumption and export while importing the good that it has comparative disadvantage in its production. The other country will specialize in the production of the second good for its domestic consumption and export the extra to the first country getting the supplies of the first good through imports. This results in benefit