Question

True or False? George Soros recently pointed out in the San Francisco Chronicle that although international trade leads to overall gains for the whole population, there are some individuals who lose from international trade. An excellent illustration of this idea is represented by the Ricardian model. Explain with reasons.

Answer 1

False.

The statement in itself is true, that some parties do tend to miss out on the benefits of trade, but the Ricardian model does not illustrate the same.

According to the Ricardian model, all parties can benefit from trade even if one of them has no advantage in the production of any commodity. According to the Comparative Advantage theory which is given by David Ricardo, mutually beneficial trade can happen between a country that has an advantage in the production of both the commodities and another country that has no advantage in the production of either commodity.

According to this model, the disadvantaged nation has to specialise in the production of the commodity in which its absolute disadvantage is lesser (i.e. it has comparative advantage) and exchange that for the commodity in which its absolute disadvantage is more with the other nation. This way, both the nations can benefit from the trade.

But in actuality, it is true that not all countries can benefit mutually from trade, as when trade takes place between a developed country and a developing country, the terms of trade are more suited towards the developed country as they have more say in the state of affairs.