Ricardian theory assumes perfect mobility of labour
Answers
Answer:
The Ricardian model shows the possibility that an industry in a developed country could compete against an industry in a less-developed country (LDC) even though the LDC industry pays its workers much lower wages.
The modern version of the Ricardian model assumes that there are two countries producing two goods using one factor of production, usually labor. The model is a general equilibrium model in which all markets (i.e., goods and factors) are perfectly competitive. The goods produced are assumed to be homogeneous across countries and firms within an industry. Goods can be costlessly shipped between countries (i.e., there are no transportation costs). Labor is homogeneous within a country but may have different productivities across countries. This implies that the production technology is assumed to differ across countries. Labor is costlessly mobile across industries within a country but is immobile across countries. Full employment of labor is also assumed. Consumers (the laborers) are assumed to maximize utility subject to an income constraint.
Below you will find a more complete description of each assumption along with a mathematical formulation of the model.
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Concept:
The possibility that an industry in a developed country could compete against an industry in a less-developed country even though the LDC industry pays its workers much lower wages, is shown in the Ricardian Theory.
The following assumptions are taken under the Ricardian Theory-
• Two goods are produced using one factor of production(labour) by two countries.
• The market (goods and factor market) is perfectly competitive and the model is general equilibrium model.
• Good which are produced are homogeneous across countries and firms within an industry.
• There is no transportation cost of goods.
• Labour have different productivities across countries but is homogeneous within a country. Which impies that labour is mobile across industries within a country but is immobile across countries.
• Labour is fully employed
• Labour maximize utility subject to an income constraint.
Explanation:
When we talk about the labour factor in this theory, we come to know that
Since labour is assumed to be immobile across countries, it can’t move from one country to another in search of higher wages.
However, labour is assumed to be costless and freely mobile between industries within a country, which implies that workers in one industry can move to other industry without any cost incurred by the workers or the firm.
Hence we can conclude that, Ricardian Model assumes the perfect mobility of labour.
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