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2014 | OriginalPaper | Chapter

5. Stripping Away Ricardo’s Assumptions

Authors : Farrokh Langdana, Peter T. Murphy

Published in: International Trade and Global Macropolicy

Publisher: Springer New York

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Abstract

Finally we strip away David Ricardo’s restrictive assumptions one by one to find out: does Ricardian theory hold up even without these assumptions, in the real world? We explore the Production Life Cycle hypothesis, where countries move up the value chain, initially moving from agriculture into simple manufactures as they open up to trade, and progress through to higher and higher levels of production over time. We see how intra-industry trade, which accounts for a significant portion of the world’s trade overall, fits nicely within the Ricardian model. We present the Boeing 787 Dreamliner as a case study in intra-industry trade.

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previous chapter Factor Intensity

next chapter Trade Barriers and Protectionism

Actually by the original firm (or firms) within that country that developed the technology. However, here we are focusing on the effects of the PLC on the country as a whole.

Later we discuss the role of macroeconomic policies in fostering this “environment” that generates innovation. Deregulation (very controversial following the subprime crisis), low taxes, free trade, education, infrastructure, and enlightened government policies are key factors. We will also discuss the role of government spending in innovation; “strategic trade” will be discussed in detail in Chap. 6.

Beverage Digest. 2011. 59(5). http://www.beverage-digest.com/pdf/top-10_2011.pdf. Accessed February 6, 2011

“Breakfast Food Statistics,” Topher’s Breakfast Cereal Character Guide. 2011. http://www.lavasurfer.com/cereal-stats.html. Accessed September 6, 2012

Howard, Phil, and Ginger Ogilvie. 2011. “Concentration in the US Beer Industry.” https://www.msu.edu/~howardp./beer.html. Accessed September 6, 2012

“Oligopoly Examples.” YourDictionary. LoveToKnow, n.d. http://examples.yourdictionary.com/oligopoly-examples.html. Accessed September 5, 2012. The inclusion of breakfast cereal and beer in our list of oligopolies was also inspired by this site.

This may initially be driven by the fact that countries with similar factor endowments tend to be geographically close to each other, or are perhaps more culturally comfortable allowing a greater degree of open trade, or some combination thereof.

Deardorff AV (1980) The general validity of the law of comparative advantage. J Polit Econ 88(5):941–957. The intrepid student might also turn to Jones RW (1961) Comparative advantage and the theory of tariffs: a multi-country, multi-commodity model. Rev Econ Stud 28(3):161–175; Dornbusch R, Stanley F, Samuelson PA (1977) Comparative advantage, trade, and payments in a Ricardian model with a continuum of goods. Am Econ Rev 67:823–839; Eaton J, Kortum S (2002) Technology, geography, and trade. Econometrica 70(September):1741–1779; and Costinot A (2009) An elementary theory of comparative advantage. Econometrica 77(July):1165–1192.

As always, we assume a generally benevolent political and economic climate among the trading countries. Tyrannical, capricious, or unstable regimes provide strong motivations for the flight of all resources, human and otherwise. Such regimes generally do not provide the stable climate necessary for the benefits of trade to fully materialize. To include such countries into our analysis would lead us far afield into the areas of political economy, foreign affairs, and even military strategy.

Unlike many of the “news articles” in this text which are presented to illustrate broad and timeless themes, this case is drawn from a real-world example. As a footnote to the story, Scott Carson was replaced in August, a few months after he made the comments quoted here. The first 787 Dreamliner was delivered in September, 2011 after 4 years of production delays.

Weber, Joseph, Sheryl Gay Stolberg, and Robert Pear. January 16, 2009. Boeing to Rein in Dreamliner Outsourcing, Bloomberg BusinessWeek http://www.businessweek.com/bwdaily/dnflash/content/jan2009/db20090116_971202.htm Accessed August 24, 2012

Apple’s USA workforce increased from under 27,500 in 2008 to 47,000 in early 2012, according to the company. Source: Gaimes, Liz. March 12, 2012. Apple Claims Credit for 514,000 U.S. Jobs. http://allthingsd.com/20120302/apple-claims-credit-for-514000-u-s-jobs/. Accessed August 20, 2012

Hong Kong’s per capita GDP in 1980 was less than half that of the United Kingdom ($6,000 versus. $13,000 USD); by 2012, at $37,000 it exceeded the UK’s $28,000 by more than 30 %. Source: Trading Economics. http://www.tradingeconomics.com/hong-kong/gdp-per-capita. Accessed October 12, 2012

“Lesotho Country Report”, Global Finance, accessed August 18, 2012. http://www.gfmag.com/gdp-data-country-reports/234-lesotho-gdp-country-report.html#axzz27PM3WuMx. See also Robyn Curnow. Lesotho plans for life without U.S. trade lifeline. CNN. http://edition.cnn.com/2011/BUSINESS/02/15/lesotho.textiles.aids.agoa/index.html. Accessed August 20, 2012

Title: Stripping Away Ricardo’s Assumptions
Authors: Farrokh Langdana
Peter T. Murphy
Publisher: Springer New York
Book: International Trade and Global Macropolicy
Print ISBN: 978-1-4614-1634-0

Electronic ISBN: 978-1-4614-1635-7

Copyright Year: 2014
DOI: https://doi.org/10.1007/978-1-4614-1635-7_5