Sign Up Now
Get instant access to over 1 million+ study documents
OR
Already registered? click here to login
By creating your account, you agree to our terms of service, privacy policy and student honor code.
The measurement error may come from any number of omitted variables.
Researchers also found that when the dependent variable is relative exports, productivity shows slightly better results than unit labor costs, but the reverse is the case when the dependent variable is bilateral trade balances.
In other words, the authors discovered 'fairly strong [empirical] support" for the Ricardian model despite the intense difficulties in structuring international comparisons between productivity and labor compensation (although the authors found their PPP approach valuable). The authors concluded that:
in the vast majority of cases, relative productivity and unit labor cost help to explain U.S. bilateral trade pattern, particularly when sector-specific purchasing-power-parity exchange rates are used. In most cases, only a small part of the variation of trade patterns is explained by the model, but this is common in cross-sectional analysis (Golub & Hseih (2000), p.231).
They concluded that "despite its extreme simplicity, the Ricardian model continues to perform surprisingly well empirically." (ibid.)
Golub and Hseih (2001) were not the only ones who provided empirical support for the Ricardian theory. The Hungarian economist, Bela Balassa, provides further evidence of the confirmation of the Ricardian model. Comparing the ratio of U.S. To British labor productivity, in 1951, for 26 manufacturing industries, he discovered that a positive correlation existed between labor productivity and exports (Choi, & Kwan, 2002 )
In a series of time-series research, Ashenfelter and Jurajda (2001) indicated that wage changes over time corresponded sharply with productivity changes, as see for instance this figure of the U.S.A. where an upward drift in wages between 1973 to 2000 showed a corresponding upward curve in labor productivity. More clearly seen is in this figure of Sweden in the same years, where the fluctuating wwage level shows precisely the same fluctuating pattern in labor...
The two therefore seem to be closely correlated. A look into six other countries showed similar significant correlations.
In conclusion, although the Ricardian model is difficult to test and may be obstructed by various limitations, a number of researchers have managed to provide empirical corroboration of the model. Researchers include Macdougall (1951,1952), Stern (1962), Harrigan (1997), Eaton and Kortum (2002), Kerr (2009), and Costinot, Donaldson, and Komunjer (2011). The Ricardian model argues that companies and countries manage to achieve superior results and higher productivity levels due both to increased wages and greater technological / labor advantage. The model may be simplistic and classical but it appears to show enduring effects.
References
Ashenfelter, O. & Jurajda, a (2001). Cross-country comparisons of wage rates, http://www.crei.cat/activities/sc_conferences/12/ashenfe.pdf
Costinot, a., D. Donaldson and I. Komunjer (2011) What Goods Do Countries Trade?
A Quantitative Exploration of Ricardo's Ideas, Review of Economic Studies, forthcom-
ing
Ricardian Model As the world has been increasingly globalizing, international trade and the different factors that facilitate trade have become of critical importance. Many countries and labour markets receive many benefits from trade and specialization. However the mechanisms that constitute a comparative advantage and determining which labour markets are suited for different production opportunities is still largely debated. David Ricardo proposed that technology could explain many of the labour variations however
Ricardo's Theory Of Competitive Advantage Ricardo's Competitive Advantage Theory in international trade is as valid today as when it was first proclaimed. Ricardo's theory holds that every country should engage in free trade, just as Adam Smith alleged that all individuals should engage in free and fair trade. Smith stated that all human beings specialize, produce goods or service in excess of what they need, and thus can barter or exchange
country has absolute advantage over other countries in producing a certain line of goods if it can produce those goods at a higher productivity level or a lower cost (Suranovic, 2015; Kilic, 2002). In contrast, a country has comparative advantage if it can produce the same goods at a lower opportunity cost than other countries (Suranovic, Kilic). These are the brief meanings of these two terms. A country possesses absolute
In the real world, most markets are far from fully competitive, labor-productivity within a country varies over time and full employment is just a dream in most capitalist economies. (Suranovic 1997) Given the list of such 'unrealistic' assumptions made in the model, it is easy for us to dismiss the results of comparative advantage altogether or to accept it with a large dose of skepticism. But would such dismissal be
International Economics How does the Heckscher-Ohlin theory differ from Ricardian theory in explaining international trade patterns? In the Ricardian model only one factor of production, labor, is needed to produce goods and services (Suranovic). The productivity of labor is assumed to vary across countries, implying a difference in technology between nations. The difference in technology results in advantageous international trade. On the other hand, the Hecksher-Ohlin model uses two factors of production
Adam Smith's theory of absolute advantage and Ricardo's theory of comparative advantage offer two economic approaches to international trade. Each theory contributes to the field of international economics in different ways. This literature review will compare the two theories through the lens of scholarly articles published on the respective subjects. By the 18th century (1776 to be exact), the development of international trade had reached a critical nexus: the colonies in