Exclusion in ‘Ricardian’ Trade Models

Abstract

In the so-called ‘Ricardian’ trade models, exclusion from trade is impossible because a country can always compensate its technological backwardness with low wages. This result is ensured in these models due to the very restrictive assumption that production requires unassisted labor alone. The present paper shows that the moment conditions of production realistically consider (a) the presence of capital goods and (b) a positive interest rate under international capital mobility, the likelihood of exclusion can no longer be neglected. We develop a model in which imported means of production may impose the presence of a positive lower bound to production costs even if there were no limits to the fall in the rate of domestic real wages. Exclusion is, therefore, the result of this lower bound being higher than the prevailing international price, both for capital and consumption-goods sectors. We finally examine the connection between hypotheses (a) and (b) and the existence of this positive lower bound, both in the model and under alternative assumptions about technology and show that under the hypothesis of technical dependency it is possible that a country is excluded from trade even if there is no capital mobility.