Simple Extensions of Ricardian Model
Diminishing Returns
- More of a good a country produces, the greater the units of resources required to produce each additional units.
Can happen for two reasons
- All resources are not equal. (e.g., some land more fertile than other)
- Different goods use resources in different proportions (e.g., agriculture and high tech)
Thus in reality a country should produce a range of goods that it can produce efficiently. Gains from trade should not be outweighed by diminishing returns.