The Ricardian model is a simple picture of international trade between nations, which was created to show comparative advantage in producing goods and the gain from trade. The concept of comparative advantage was introduced by David Ricardo in 19th century. The country has comparative advantage in producing certain product if it can produce it at a lower cost than any other country. The Ricardian model has been developed on following assumptions: * Only two countries are involved in activities; * Only two goods can be produced; * Labor is the only factor of production.
The Ricardian model is a useful key for economy, because it explains why trade between countries can happen and how it will effect national welfare (Krugman, 2012).
Countries should export a product in which they are most productive to fulfill the prediction of the Ricardian model. The principal of the model is defined by specialization, meaning countries specialize in goods they export. This will not hold in the data. However, the prediction that countries tend to export those goods they have high labor productivity is confirmed in data.
Since 1950s, there has been a few attempts to empirically test the validity of the comparative advantage theory. McDougall, Stern, and Balassa have claimed that they found confirmation for the model by using the data from World War II. However, later researches have criticized this model, and fallacies have been found (“International Trade Relations”, 2014).
The model was tested by McDougall in 1952. He used data on 25 products from 1937 to compare labor productivity and exports for the US and Britain. He tested if their relative export to third world countries were connected with their labor productivity. Unfortunately, the result was not consistent with the model. Nevertheless, McDougall explained these difference as a result of technology, the