Feenstra, Advanced International Trade Chapter 1: Preliminaries: Two-Sector Models We begin our study of international trade with the classic Ricardian model, which has two goods and one factor...

Feenstra, Advanced International Trade Chapter1: Preliminaries: Two-SectorModels Webeginourstudyofinternational trade withtheclassicRicardianmodel,whichhas twogoods andonefactor (labor). TheRicardian model introduces us to theideathat technological differences across countries matter. In comparison, theHeckscher-Ohlin model dispenses withthenotionoftechnological differences and instead showhow factor endowments form thebasis fortrade. Whilethis maybe finein theory,it performs verypoorlyinpractice: as weshowinthenext chapter,theHeckscher-Ohlin model is hopelesslyinadequateas an explanationforhistorical ormoderntradepatterns unless weallowfortechnological differences across countries. Forthis reason,theRicardianmodel is as relevant todayas it has always been. Ourtreatment ofit inthis chapteris asimplereviewofundergraduatematerial,but wewill have theopportunityto referto this model again at various places throughout thebook. AfterreviewingtheRicardian model, weturntothetwo-good,two-factor model which occupies most ofthis chapterandforms thebasis oftheHeckscher-Ohlin model. Weshall supposethat thetwogoods aretradedoninternationalmarkets,butdonotallowforany movements offactors across borders. This reflects thefact that themovement oflaborand capital across countries is often subject to controls at theborder and generallymuch less free thanthemovement of goods. Ourgoal inthenextchapterwillbetodeterminethepatternof international tradebetween countries. In this chapter,wesimplifythings byfocusingprimarily on onecountry,treatingworldprices as given,andexaminetheproperties ofthis two-by-two model. Thestudent who understands all theproperties ofthis model has alreadycome along wayinhis orherstudyof international trade.Feenstra, Advanced International Trade 1-2 RicardianModel Indexinggoods bythesubscript i,let a denotethe laborneededperunit of productionof i * each good at home, whileaisthelaborneedperunitofproductionintheforeigncountry, i i=1,2. Thetotal laborforceat homeis...