CID Working Paper No. 13

An Infra-marginal Analysis of the Ricardian Model

Wen Li Cheng, Jeffrey D. Sachs, and Xiaokai Yang

April 1999

Abstract

This paper applies the infra-marginal analysis, which is a combination of marginal and total cost-benefit analysis, to the Ricardian model. It demonstrates that the rule of marginal cost pricing does not always hold. It shows that in a 2x2 Ricardian model, there is a unique general equilibrium and that the comparative statics of the equilibrium involve discontinuous jumps -- as transaction efficiency improves, the general equilibrium structure jumps from autarky to partial division of labor and then to complete division of labor. The paper also discusses the effects of tariff in a model where trade regimes are endogenously chosen. It finds that (1) if partial division of labor occurs in equilibrium, the country that produces both goods chooses unilateral protection tariff, and the country producing a single good chooses unilateral laissez faire policy; (2) if complete division of labor occurs in equilibrium, the governments in both countries would prefer a tariff negotiation to a tariff war. Finally, the paper shows that in a model with three countries the country which does not have a comparative advantage relative to the other two countries and/or which has low transaction efficiency may be excluded from trade.

Keywords: Ricardo model, trade policy, division of labor

JEL codes: F10, F13, D50

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