Conclusion

Through this module, you have seen how specialization can increase output in the world economy, even when there are high differences in productivity. Although trade can improve global market efficiency, it is important to consider the negative consequences trade has on local communities and labor markets if the gains are not distributed evenly.

Research by David Autor, David Dorn, and Gordon Hanson (2016) showed how China’s emergence in international markets impacted unemployment, wages, and inequality in some communities in the United States. Dani Rodrik (2021) has discussed how globalization can affect populist attitudes, while Anne Case and Angus Deaton showed how a deterioration in economic conditions can contibute to the increased morbidity and mortality in their book Deaths of Despair (2020).

Using the Ricardian model, you learned how trade could increase the consumption of both goods in the global economy when countries trade and benefit from specialization. However, this model does not help us determine how both countries set the prices or quantities they will trade, which is crucial when establishing who will benefit most from trade.

The fact that models simplify reality does not necessarily imply that their results are simple. The mathematician Stanislaw Ulam challenged the economist Paul Samuelson to name a proposition from economics that was true and non-trivial. Samuelson replied precisely with Ricardo’s theory of comparative advantage. Over two centuries later, Ricardo’s theory is still an important first step in understanding the implications of specialization and trade.