Putting Ricardo to Work

Presented with the opportunity to trade, countries bene…t by specializing in the activities they do relatively better. This …nding, the principle of comparative advantage, is one of the …rst analytic results in economics. While Adam Smith (1776) made a much earlier case for free trade, he based it on increasing returns to scale, and provided no formal demonstration. In contrast, David Ricardo (1818) provided a mathematical example showing that countries could gain from trade by exploiting innate di¤erences in their ability to make di¤erent goods. The basic Ricardian example, in which two countries do better by specializing in one good and exchanging it for another, even when one of them is better at making both, typically gets presented in the …rst or second chapter of a text on international trade, and sometimes appears even in a principles text. Its purpose is to demonstrate the gains from specialization and trade in a way that at least a bright student can absorb quickly. But having served its pedagogical purpose, the model was rarely heard from again. As one example, Feenstra (2004), the leading Ph.D. text in international trade, devotes only three pages to the Ricardian model. During the Twentieth Century, the theoretical and quantitative analysis of international trade turned …rst to di¤erences in factor endowments and then to increasing returns to scale as explanations for trade and its bene…ts. The Ricardian model became something like a family heirloom, brought down from the attic to show a new generation of students, and then put back to allow them to pursue more fruitful lines of study and research.