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An Infra-marginal Analysis of the Ricardian Model

Author

Listed:
  • Wen Li Cheng
  • Jeffrey D. Sachs
  • Xiaokai Yang

Abstract

This paper applies the infra-marginal analysis, which is a combination of marginal and total cost-benefit analysis, to the Ricardian model. It demonstrates that the rule of marginal cost pricing does not always hold. It shows that in a 2x2 Ricardian model, there is a unique general equilibrium and that the comparative statics of the equilibrium involve discontinuous jumps -- as transaction efficiency improves, the general equilibrium structure jumps from autarky to partial division of labor and then to complete division of labor. The paper also discusses the effects of tariff in a model where trade regimes are endogenously chosen. It finds that (1) if partial division of labor occurs in equilibrium, the country that produces both goods chooses unilateral protection tariff, and the country producing a single good chooses unilateral laissez faire policy; (2) if complete division of labor occurs in equilibrium, the governments in both countries would prefer a tariff negotiation to a tariff war. Finally, the paper shows that in a model with three countries the country which does not have a comparative advantage relative to the other two countries and/or which has low transaction efficiency may be excluded from trade.

Suggested Citation

  • Wen Li Cheng & Jeffrey D. Sachs & Xiaokai Yang, 1999. "An Infra-marginal Analysis of the Ricardian Model," CID Working Papers 13A, Center for International Development at Harvard University.
  • Handle: RePEc:cid:wpfacu:13a
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Cheng, Wenli & Zhang, Dingsheng, 2016. "How might the South be helped by Northern technology yet harmed by Northern money?," Economic Modelling, Elsevier, vol. 55(C), pages 83-91.
    2. Jeffrey Sachs & Xiaokai Yang & Dingsheng Zhang, 2005. "Globalization, Dual Economy, And Economic Development," World Scientific Book Chapters,in: An Inframarginal Approach To Trade Theory, chapter 16, pages 349-382 World Scientific Publishing Co. Pte. Ltd..
    3. Soo, Kwok Tong, 2017. "Indivisibilities in the Ricardian model of trade," Economic Modelling, Elsevier, vol. 63(C), pages 311-317.
    4. Cheng, Wenli & Yang, Xiaokai, 2004. "Inframarginal analysis of division of labor: A survey," Journal of Economic Behavior & Organization, Elsevier, vol. 55(2), pages 137-174, October.
    5. Zhihao Yu, 2003. "IT, Production Specialization, and Division of Labor: A Smith-Ricardo Model of International Trade," Carleton Economic Papers 03-06, Carleton University, Department of Economics.
    6. Xiaokai Yang & Dingsheng Zhang, 2005. "Endogenous Structure Of The Division Of Labor, Endogenous Trade Policy Regime, And A Dual Structure In Economic Development," World Scientific Book Chapters,in: An Inframarginal Approach To Trade Theory, chapter 17, pages 383-406 World Scientific Publishing Co. Pte. Ltd..

    More about this item

    Keywords

    Ricardo model; trade policy; division of labor;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

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