Exclusion in "Ricardian" Trade Models

CSWP 39 (December 2019)

Author Eduardo Crespo, Ariel Dvoskin and Guido Ianni

Keywords absolute advantage; comparative advantage; exclusion from trade; pattern of specialization; Ricardian models of trade.

JEL B27; B51; F11.

The paper discusses the following result of the so-called ‘Ricardian’ models of international trade: the impossibility of exclusion from trade. We show that this result holds due to the very restrictive assumptions behind these models: (i) commodities are produced by unassisted labour alone under (ii) complete factor immobility. The moment these assumptions are relaxed, the likelihood of exclusion can no longer be neglected. The reason is the following: even if there were no limits to the fall in the rate of domestic real wages, production costs would reach a positive lower bound due to the presence of imported capital goods. Exclusion is therefore the result of this lower bound being higher than the prevailing international price, for both capital and consumption-goods sectors

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