Ricardian Trade Model
Comparative advantage formalized: technology differences, specialization, and the terms of trade.
Definition
The formal trade model of comparative advantagecomparative advantageBeing able to produce something at a lower opportunity cost than others, the true basis for trade.: one factor (labor), technology differences across countries, complete specialization, and gains from trade for both sides.
Key equation
Home exports X if aLX/aLY < a*LX/a*LY (relative unit labor requirements)
The intuition
Even a country worse at making everything exports what it's LEAST bad at: world output rises when each country's labor flows to its lowest-opportunity-cost use. Wages settle so that unit costs, not raw productivity, decide competitiveness.
Exam tip
The terms of tradeterms of tradeThe rate at which exports exchange for imports. must lie BETWEEN the two autarky price ratios, outside that band, one country refuses to trade.
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