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The Ricardian theorem suggests that exports and their prices are positively related. From the previous example...

  • The Ricardian theorem suggests that exports and their prices are positively related. From the previous example in lecture we saw this positive relationship in Japanese industries in the 1850s and 1860s. However, does this relationship still hold today?


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Answer #1

It is true that prices of goods produced domestically determines competitiveness in International markets. If goods become expensive due to inflation or due to any other factor they lose competitiveness and exports go down.

However, it is not only the price that determines exports. Trade blocs can change this situation. Trade diversion happens when tariff agreements cause imports to shift from low-cost countries to higher cost countries.

Hence If there is trade bloc between India and UK then India may replace low cost imports of clothes from China to UK as UK may offer free trade area to Indian agricultural goods.

Hence even if Price-export relation holds today, it is subject to many things today like trade diversion, trade blocs, tariff policies etc.

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