The Neo-Ricardian Trade Theory and the New Theory of International Values

Abstract

Ricardo’s (On the principles of political economy, and taxation, 1817) theory of comparative advantage is the first rigorous theory that demonstrates that free trade benefits every country. He explained his theory using a numerical example of two countries and two commodities. However, the fact that the theory cannot be true when we expand his model to the multicountry and multicommodity case, or to the model that assumes intermediate goods, became clear. Following the study by Graham (Q J Econ 46:581–616, 1932) and McKenzie (Rev Econ Studies 21: 165–180, 1954), the neo-Ricardian theories of international trade as developed by Steedman (Fundamental issues in trade theory, Macmillan, London, 1979) reconsidered gains from trade and showed the possibility of losses from free trade. Recently, Shiozawa (Evol Inst Econ Rev 3: 141–187, 2007) indicated the differences in the number of countries and goods and analyzed cases in which prices did not depend on demand but were determined by production cost. This chapter surveys the development of trade theories and analyzes the gains from trade using the most generalized model. Furthermore, it also considers how the new theory of international values proposed by Shiozawa (Evol Inst Econ Rev 3: 141–187, 2007) provides a new horizon to the previous results.