According to the Ricardian model, with a continuum of tradable goods, the increased productivity of all workers in one country increases the real rights of workers in both countries. Is this true or false?
Ricardian’s theory of comparative advantage says that countries should produce and export those goods which they can produce at lower costs than other countries. This leads to specialization which in turn leads to increase in production efficiency. Typically, under free trade conditions, a country or a business will produce more and consume less of goods that it has a comparative advantage of. According to the Ricardian model, with a continuum of tradable goods, the increased productivity of all workers in one country increases the real rights of workers in both countries - however, this statement does not hold. The reasons are as follows: Firstly, the theory was propounded by Ricardian in the 19th century. World trade now operates on “competitive advantage” rather than “comparative advantage”. Countries offer export subsidies to companies. They also impose import restrictions which makes it difficult for foreign companies to compete with domestic companies. This increases the condition of workers in that country only. Secondly, the comparative advantage theory holds under condition of perfect competition and undistorted markets. In reality that is rarely the case. Thirdly, Ricardian’s model is based on the assumption of immobility of capital. Now capital flows to areas or countries where they can be manufactured more profitably.