A. Explain the case for free trade in Ricardo’s model of trade
David Ricardo was a British economist born in 1772. He shared, throughout his life, several theories about the classical economy but we are now going to emphasize in the free trade theory, which is, besides, his most famous argument.
The high rate of industrialisation necessitated …show more content…
Country “A” will try to specialize in that good in which they have a comparative advantage with respect to country “B” and inversely. The product that they are not so good at producing will be imported from the other country in both cases. There are sometimes in which a country is a better producer in both products (remember in Ricardo’s theory there are only 2 products traded). In this case, the other country follows the same pattern: it has to continue specializing in that good which is more competitive at producing, in other words, they must specialize in that good in which the country gives up less amount of the other good when producing an extra unit. Ricardo points out how beneficial this trade can be for the two countries as their opportunity costs. He sets numerical examples in where it is shown the difference of trading under autarky, and then, with a free trade between countries. There are clear evidences that it is beneficial to make use of his theory while trading because, both the global and the countries outputs increased considerably. This is mainly due to the dodging of the opportunity cost, if both countries produce exclusively what they are more efficient at, they can then, trade between each other and increase their combined output, therefore, the global turnout does also …show more content…
Paul gives to refute David Ricardo is the fact he considers that there are some costs not taken into account when developing the theory. These are defined as environmental costs or sunk costs among others. (The impact of free trade on workers and the problem of social dumping.)
As said, it is said against the free trade theory that we have to consider the costs. He points out that if free traders saw there are more efficient factories in terms of costs in other places, the workers of the industry would move to that place in which there is more productivity.
Regarding environmental costs, there is an example between China and the U.S in order to refute the Ricardo’s comparative advantage theory. What it basically reminds is the fact that the process of production within the different countries (in this case China and U.S) is not the same. This statement could sound obvious to us but it is referred to the environmental scope. The requirements are not the same in China and in the U.S. Chinese products do not have to meet the same environmental standards, they have to much less processes to meet the market, which makes their products less costly, and thus, more competitive regarding the David Ricardo’s theory. (Joel R. Paul (2015)) This example suggests that we can then have a distorted pattern of trade. It is also stated that there is a problem of social dumping. He says that dumping `occurs when a country exports goods without