What are the Assumptions Underlying the Ricardian Doctrine of International Trade?
Ricardo’s presentation of the doctrine of comparative costs has been based on certain implicit and explicit assumptions as follows:
1. There are only two countries exchanging only two commodities. It thus, assumes a very simple two-country, two-commodity model.
2. Labour is the most important factor of production. It is the only productive factor, so that, all other factors can be reduced to labour to avoid complexities.
3. Ricardo in his model ignores existence of money and considers cost of production in real terms: in terms of the labour theory of value. Prices of different goods are determined by their real costs of production. The real cost is measured by the units of labour embodied in producing the goods. In short, the exposition of the theory is based on the labour cost principle alone.
4. The theory, further, assumes that, there is perfect mobility of factors of production within the country but that they are perfectly immobile between two countries. This assumption was fundamental to the theory as the theory advocates geographical specialisation because of unequal distribution of factors of production. If factors can move from one country to another freely, then the very basis of international specialisation will disappear.
5. It also, assumes that the returns to scale of production are constant in both the countries.
6. This theory, like all other classical dogmas, also assumes that there exists full employment of all the factors of production (in both the countries).
7. There exists free trade. That is, there are no barriers of tariffs or controls to the international I trade between the two countries.
8. Finally, the Ricardian principle of comparative costs also implies that, there exists no cost of transfer. Thus, the element of transport cost is ignored.