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An Infra-marginal Analysis of the Ricardian Model

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Listed:
  • Wen-Li Chen
  • Xiaokai Yang
  • Jeffrey D. Sachs

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 Chen & Xiaokai Yang & Jeffrey D. Sachs, 1999. "An Infra-marginal Analysis of the Ricardian Model," CID Working Papers 13, Center for International Development at Harvard University.
  • Handle: RePEc:wop:cidhav:13
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    Cited by:

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    2. 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.
    3. 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..

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    More about this item

    Keywords

    Ricardo model; trade policy; division of labor;
    All these keywords.

    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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