In chapter 2, you have studied David Ricardo's theory on Gains from Specialization and Trade. Please comment on one of the statements below, and briefly discuss if you agree or why not.
a. "Canada can still gain from specialization and trade with the US despite the fact that Canada's economy is a lot smaller than the US economy. Absolute size does not matter."
b. "If some people are very talented, then these individuals must have a comparative advantage in everything they do and should never specialize and trade
Answers
Answer:
This chapter presents the first formal model of international trade: the Ricardian model. It is one of the simplest models, and still, by introducing the principle of comparative advantage, it offers some of the most compelling reasons supporting international trade. Readers will learn some of the surprising outcomes of the Ricardian model; for example, less productive nations can benefit from free trade with their more productive neighbors, and very low-wage countries are unlikely to be able to use their production cost advantage in many circumstances. Readers will also learn why so many people, even those who have studied the Ricardian theory, consistently get the results wrong.
In other words, the Ricardian model is both one of the most misunderstood and one of the most compelling models of international trade.