Question

What is the implication of the perfect competition assumption in the Ricardian model?

Answer 1

In the Ricardian model which is the simplest model of international trade, there are two countries which trade in two goods produced using the same factor of production. The goods are assumed to be identical across firms and countries. There is no transaction cost between countries. There is full employment of labor and both goods and labor market are in a perfectly competitive market where firms are maximizing their profits and workers their respective utility. The implication of such suitable assumptions is that both countries benefit from free trade.