Comparative Advantages and Demand in the New Competitive Ricardian Models

Published date01 February 2018
Date01 February 2018
Subject MatterArticles
Comparative Advantages
and Demand in the
New Competitive
Ricardian Models
Carlos A. Cinquetti1
We survey the new Ricardian models of bilateral trade, which are seen as trac-
table structure for multi-country trade models addressing either cost or demand
linkages to trade. Cost-based Ricardian models advance new forms of compara-
tive advantages that are irrespective of autarky price and, in some cases, even
of opportunity cost. A less noticed feature is their reliance in demand function
that does not disturb cost-based prices. Demand-based Ricardian models hinge
especially on non-homothetic preferences for asymmetric goods and the supply-
side ordering of goods mirrors the demand-side ordering. We also critically
discuss extensions of these latter competitive models to trade in quality. We fur-
ther seek to identify all these models vis-à-vis the Ricardo–Haberler–Deardorff
JEL: F10, 019, D5
Ricardian models, multi-country economies, comparative advantages, demand,
trade cost, non-homothetic preferences
The newest multi-good, multi-country trade models promoted a revival of the
competitive Ricardian trade models. The latter introduced some radical novelties
such as comparative advantages hinging neither on opportunity cost, nor on
Foreign Trade Review
53(1) 29–48
2018 Indian Institute of
Foreign Trade
SAGE Publications
DOI: 10.1177/0015732516681884
Corresponding author:
Carlos A. Cinquetti, Economics Department, São Paulo State University, Rod. Araraquara-Jaú, Km 01
Araraquara, SP 14800-901 Brazil.
1 Economics Department, São Paulo State University, Rod. Araraquara-Jaú, SP, Brazil.
30 Foreign Trade Review 53(1)
autarky prices and, at the other extreme, comparative advantages are not even
central. As a result, a puzzling question that follows is how can these models be
defined as Ricardian.
The first thing to bear in mind, when thinking about this question, is the con-
cern with treatable general equilibrium in trade models, which traditionally
involved focusing on the supply side of that equilibrium (see Caron, Fally, &
Markusen, 2014). Stronger reasons for simplification arise in multi-good, multi-
country models, which led to the Ricardian technology. However, the classical
pairwise Ricardian comparative advantages of Dornbusch, Fischer and Samuelson
(1977, DFS hereinafter) does not fit to such a world economy. The paradigmatic
solution by Eaton and Kortum (2002, EK hereinafter) is a cost–insurance–freight
(CIF) price comparative advantage that orders exporters’ share within each
importing market with the help of a cumulative (Fréchet) probability distribution,
in which a worldwide parameter of technology variation shapes the cost linkage
to trade. To reintroduce industries, which are only subsumed in EK, Costinot,
Donaldson and Komunjer (2011) advance a bilateral trade model at industry level,
which yields a new index of revealed comparative advantages. Instead, Shikher
(2012) expands EK by introducing industries through intermediate goods.
The resulting new cost function, which accounts for the input–output linkages,
enables screening the impact of trade upon each industry in each country.
Previously some clues have been given as to how these models succeed in
achieving a treatable equilibrium in a multi-country trading economy with inter-
national technology differences. Another important side for accomplishing it is a
device introduced by DFS: a form of demand that is neutral as to the ordering of
cost-based prices. As shown below, demand has a peculiar role upon prices even
in the two-country Ricardian model.
Another strand of Ricardian model focuses on demand linkages to trade. An
early reference is the widely ignored three-sector model developed by Jones
(1979, Chapter 17)1—a reverse DFS model—whose two relative prices enable
several variations with regard to how (international) demand conditions trade
gains. In multi-good economies, the demand elasticities for goods are reduced to
the income and the own-price elasticity of demand (Wilson, 1980), which paves
the way to North–South trade models with non-homothetic preferences. An early
development by Flam and Helpman (1987) seeks to advance over models of hori-
zontal differentiation (Helpman & Krugman, 1985) by addressing vertical differ-
entiation, whereas later developments by Matsuyama (2001) seek to frame this
trade in product quality into multi-good economies. Extensions of these model-
ling of trade in quality to multi-country economies (Fieler, 2011b; Jaimovich &
Merella, 2015) have not attracted equal attention for reasons we discuss below.
Contrariwise, taking good asymmetry irrespective to quality, Fieler (2011a)
obtains a EK’s model with a North–South flavour. That is, she simply considers
group of goods with specific income elasticity of demand which, together with a
certain supply-side characteristic, conditions not only the North–South trade but
also the North–North and the South–South trade as well.
The challenge to attain a tractable equilibrium of prices and trade prices and
trade directions is another one in these Ricardian models focusing on demand

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