David vs. Diversification: Ricardian trade theory compared to financial principles, in varied designs
Abstract. The purpose of this article is to assess the extent, if any, to which trade leads to specialization, as hypothesized by the 19th Century economist David Ricardo, or diversification, as under financial principles, and if so, when does the transition between the two occur? What other political-economic factors lead to diversifying versus specializing trade as related to risk? Were these factors present in the great rise of international trade, during the 19th Century food blights and Corn Laws? Methodologically, this article uses: historical documents, a simple game theory model, an analysis of post-World War II crises, qualitative cases of risk-reducing institutions with descriptive statistics, and a statistical regression of randomly chosen countries, explaining diversification deductively. The results show that: contrary to orthodox, “Ricardian” trade theory, trade is risky, and causes expansion into diverse firms. But, countries may then turn towards specialization, as larger economic nations may be beter able to take-on risks. Still, such states may turn immobile institutionally, while organizations and diversified supply chains have helped mollify international crises. Additionally, the discussion indicates that countries may also trade similar goods, called intra-industry trade, which reduces risk, and also intermediate goods. The conclusion addresses policies for reducing risk in trade.
Keywords. International trade, Diversification, Ricardo, Risk, International Monetary Fund
JEL. B1, B50, F11, F13, G10.
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