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The Ricardian trade model

Ricardo believed that the goal of economic analysis was to understand the distribution of income between the three major classes: capitalists, workers, and landowners. He also believed that the prices of commodities would be proportional to the labor embodied in the commodities, and be independent of the wage and profit rate. So that no matter what values the profit rate and wage rate takes on prices will remain the same. In system C "a rise in the wage is unambiguously an improvement in the real (i.e., physical) income of the workers. Changes in relative prices will be a consequence of solely of changes in the facility of production of commodities. Thus, it will be possible always to distinguish between objective and technical changes on the one hand and social or distributional changes in the other. To put the same point differently, it will always be possible to distinguish between a redistribution of the existing physical surplus and a technological change that alters the size and composition of the surplus."

1. Try to explain the above.
2. Was Ricardo able to provide a rigorous "proof" of his beliefs? Explain!!

(What were the problems he encountered?)

Solution Preview

1. Try to explain the above.

Ricardo mentions that the wage is determined exogenously by the worker's subsistence requirements. On the other hand the rent and profits are determined by a competitive process in which landowners bid for land. Higher quality land with its greater productivity receives a higher bid than its lowest quality counterpart. This differential is called rent. Differential land quality and competition that equalizes profit means that any profit ...

Solution Summary

The Ricardian trade model is applied.

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