ECON6023 · International Trade
The Ricardian Model of Comparative Advantage
Week 2 builds the full 2×2 Ricardian model — labour the only input, straight-line PPFs, unit labour requirements — and derives autarky prices, the specialisation pattern and real wages in autarky and at the trade equilibrium. This is the model behind the mid-semester test's Q1 and a recurring 20-25 mark exam theory question, where the real-wage gain (w/p = MPL, scaled by the world price) is the graded punchline.
What this chapter covers
- 01Assumptions: two countries, two goods, labour the only factor, constant returns, perfect competition, immobile labour across countries
- 02Production Qᵢ = Lᵢ/aᵢ and full employment a₁Q₁ + a₂Q₂ = L; the straight-line PPF
- 03Perfect-competition pricing pᵢ = aᵢ·w, so the autarky relative price = a₁/a₂
- 04Real wage w/pᵢ = MPLᵢ = 1/aᵢ (in terms of the good produced at home)
- 05Complete vs incomplete specialisation and the world relative-price range
- 06The real-wage gain from trade: w/p in terms of the imported good rises above its autarky value
- 07Export supply (production − home consumption) and import demand; market clearing ES = ID
- 08The taught solution cookbook: CA → demand → guess specialisation → real wages → ES = ID → check the band
Real-wage gain from trade in the Ricardian model
- +1Autarky real wages. When Home produces a good, w/pᵢ = MPLᵢ = 1/aᵢ. In autarky Home makes both goods, so its real wage in wine is w/p_wine = 1/a_wine = 1/6 ≈ 0.167 wine per hour, and in cloth 1/a_cloth = 1/2 = 0.5 cloth per hour.
- +1Wage after specialising in cloth. Under perfect competition price equals unit labour cost, p_cloth = a_cloth·w, so w = p_cloth/a_cloth = p_cloth/2.
- +1Real wage in the imported good (wine). w/p_wine = (p_cloth/2)/p_wine = ½·(p_cloth/p_wine) = ½·(1/2) = 0.25 wine per hour. Because 0.25 > 0.167, purchasing power over wine has risen — this is the gain from trade.
- +1Real wage in cloth is unchanged. Home still makes cloth, so w/p_cloth = 1/a_cloth = 0.5 cloth per hour, exactly its autarky value. Trade lifts the real wage measured in the imported good while leaving it unchanged in the exported good.
Key terms
- Real wage (w/pᵢ)
- The wage measured in units of good i. When a country produces good i, w/pᵢ = MPLᵢ = 1/aᵢ. Trade raises the real wage measured in the imported good above its autarky value — the Ricardian gain from trade.
- Complete specialisation
- Each country produces only its comparative-advantage good, which happens when the world relative price lies strictly inside the autarky-price band.
- Incomplete specialisation
- At a boundary of the price band one (usually the larger) country produces both goods; the world relative price then equals that diversified country's autarky ratio while the small country specialises.
- Export supply (ES)
- For the exporting country, production minus home consumption of a good, plotted against the world relative price. It slopes upward and is zero at that country's autarky price.
- Import demand (ID)
- For the importing country, its consumption of the good it does not produce, plotted against the world relative price. Downward sloping; ES = ID pins the equilibrium world price.
- Full-employment constraint
- a₁Q₁ + a₂Q₂ = L: all labour is used. It fixes the straight-line PPF and lets you check a proposed specialisation pattern for feasibility (no negative outputs).
The Ricardian Model of Comparative Advantage FAQ
Why does trade raise the real wage only in terms of the imported good?
Because the country keeps making its export good, its real wage in that good is still just its MPL there — unchanged. But at the world price it can trade the export good for more of the imported good than its own MPL in the imported good would have delivered in autarky, so w measured in the imported good rises. That extra purchasing power is exactly the gain from trade.
When is specialisation incomplete rather than complete?
When the world relative price sits at a boundary of the price band, equal to one country's autarky ratio. That country is indifferent between the two goods and produces both (it 'diversifies'), pinning the price, while the other country specialises fully. This is usually the larger country in a size-asymmetric pair.
Can AI help me solve a Ricardian general-equilibrium problem?
Yes. Sia can walk the taught cookbook with you — assign comparative advantage, derive CES or Cobb-Douglas demand, guess complete specialisation, write real wages against the world price, and impose ES = ID — and flag when a solved price falls outside the band so you switch to incomplete specialisation. It explains and checks; it does not do graded work, and USyd academic-integrity rules apply.
How is a Ricardian exam question usually marked?
Method marks dominate: assigning comparative advantage with reasoning, stating the price band, writing the real-wage expressions (w/p = MPL, then scaled by the world price), and deriving export-supply / import-demand before solving ES = ID. A correct final price with no derivation scores poorly, so show every step and label the diagram.
Exam move
Rehearse the eight-step Ricardian cookbook end to end until it is automatic, because the mid-semester test's Q1 and one exam theory question are essentially this model with fresh numbers. Drill the real-wage argument specifically: always express the gain in terms of the imported good (MPL of the export good × world relative price) and show it beats the autarky MPL. Practise eliminating an infeasible specialisation pattern by contradiction (a negative output, or a price outside the band). Keep a clean straight-line PPF sketch with its slope labelled as the opportunity cost. Confirm the mid-semester test and exam timing on Canvas.
Working through The Ricardian Model of Comparative Advantage in ECON6023? Sia is AskSia’s AI Economics tutor — ask any ECON6023 The Ricardian Model of Comparative Advantage question and get a clear, step-by-step explanation grounded in how ECON6023 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
