• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Outline the Classical / Ricardian theory of International Trade - What do you regard as the main strengths and weaknesses of this theory as an explanation of trade patterns?

Extracts from this document...


Outline the Classical / Ricardian theory of International Trade. What do you regard as the main strengths and weaknesses of this theory as an explanation of trade patterns? Adam Smith said that by trading freely this would benefit countries as people would consume more then they otherwise would. This is true because different countries produce differing goods and by trading with one another consumers can consume those foreign goods. If there was no trade then only domestic goods could be consumed. Ricardian theory is one of comparative advantage. This is where a country chooses to produce then trade with a country within a good of which it has a comparative advantage in its production. The assumptions underlying the comparative advantage theory are as follows; the first is that the countries have only one factor production this is labour. Although this is the only factor countries have differing productivities. ...read more.


It is also a two good, two-country model in that each country produces to goods in which they have a comparative advantage in one of them in order for trade to take place. This is for simplistic purposes and so that there may actually be a comparative advantage in the production. In the theory if there is not an advantage in one of the good s production then it is not beneficial for trade to take place. MacDougall's study identifies some of the problems and strengths of the Ricardian theory. The first problem in actually testing the theory is that the assumption of free trade is not possible as there are trade barriers therefore to test the theory he had to use UK-US trade performances in third countries so to get a free trade policy. This is because the trade flows could not be looked at due to the trade barriers such as cost of transporting and some trade tariffs between the UK and US. ...read more.


In empirical terms the theory is both positive and negative. Its strength is that there is a shown correlation post trade prices and export shares. However on the other side there is a negative correlation between relative costs and relative prices. A strength is that it does explain why a country if it has an absolute advantage would want to trade. As in it can benefit from sharing or specialising production and exporting in one good (assuming the two good model) rather then producing both goods. This therefore enhances total trade within the trade economy. Another strength is that through knowing comparative advantages you can predict the trade patterns, which means that policy conclusions can occur. The Ricardian Theory does explain why trade should and indeed does take place where the absolute advantage theory says that it shouldn't exist between some countries. Therefore it does explain trade patterns, even though Bhagwati's theory suggests that it is incorrect. However it can be said that this theory is at times too restrictive. - 1 - ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Political & International Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Political & International Economics essays

  1. HRM as a threat to Trade unions.

    According to the statistics, the trade union membership in the UK peaked at 13.4 million members in 1979 (Burchill, 1997: 43) whereas the number reduced to 7.6 million in 2002 (National Statistics).

  2. Is Trade Liberalisation a Friend or Foe of Australia ?

    a decline in ERP rates leads to the cutting protection to a reduction in net subsidy equivalent, that this amount would have to be paid to have the same effect, as the current level of protection. He also states "production rose in real terms by 8.9% and the manufacturing trade balance, while still negative, has also improved".

  1. Different types of taxation and an outline of Keynsian economics.

    Self-assessment is the tax regime introduced by the Revenue in the mid-1990s - mirroring the systems already in place in the US and Australia. The system shifts the burden of administering tax affairs on to individuals. If you're worried that you may have been paying too much (or too little)

  2. The law of comparative advantage forms the basis of international trade. Explain the above ...

    The more gold and silver a country had the more powerful and rich it became. They judged the success of trade by the size of the trade balance (Lipsey, & Chrystal, 1996). Smith's absolute advantage, what many economists and historians believe were the origins on the organsied science that is

  1. Free trade

    Beside GATT, there are still others international trade agreements between countries such as 1North American Free Trade Agreement (NAFTA) (http://en.wikipedia.org/wiki/Nafta), 2ASEAN Free Trade Area (AFTA) (http://en.wikipedia.org/wiki/AFTA), and 3European Union (EU) (http://en.wikipedia.org/wiki/Eu). Whether WTO or NAFTA, their main objectives is to promote greater liberalization of trade in goods and services among nations.

  2. s the nafta beneficial for all parties?

    Canada used to gain the resources and export them. All the added value was created abroad. This has changed over the years, now Canada is adding more value to the products itself´┐Ż4. Figure 2 (Source: http://www.statcan.ca/english/Subjects/Labour/LFS/lfs-en.htm) One of the fears of the opponents was that the NAFTA would have a huge effect of the amounts of jobs in the U.S.

  1. The Theory of Human Capital: Egypt and the USA examined.

    returns of the investment is bigger than the present value of the cost of the investment. In this paper, I intend to examine human capital investment decisions in Egypt. By using Internet based and field-based research, I shall investigate the factors that affect human capital investment decisions and test for

  2. The establishment of the World Trade Organisation has led to a significant reduction in ...

    Again, standards and certification procedures do not conform to the overall pattern of NTM prevalence. For example, there is a positive correlation between complaints about standards and certification and per capita GDP. However, as in the case of the relationship between tariffs and NTMs, these results will need to be

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work