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 Methodologically, this article uses: historical documents, a simple game theory model, an analysis of post-World War II crises, qualitative cases of risk-reducing institutions with descriptive statistics, and a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.


International trade; Diversification; Ricardo; Risk; International Monetary Fund.

Full Text:


Aslani, A., Helo, P., & Naaranoja, M. (2004). Role of renewable energy policies in energy dependency in Finland: System dynamics approach. Applied Energy, 113(1), 758-765. doi. 10.1016/j.apenergy.2013.08.015

Australian Bureau of Agricultural and Resource Economics and Sciences. (2012). Drought in Australia: Context, policy and management, March. [Retrieved from].

Australian Bureau of Statistics. (2014). A review of selected regional industrial diversity indexes, 2011, released December 12, 2014. Access on June 28, 2016. [Retrieved from].

Ayers, C.E. (1962). The Theory of Economic Progress: A Study of the Fundamentals of Economic Development and Social Change. 2nd ed. New York: SchockenBooks.

Barrett, B., & Notaras, M.(2012). Future of food in Japan. Our World, posted February 29, 2012. Access on June 23, 2016. [Retrieved from].

Barry, C. (2008). Australia’s long drought withering wheat, rice supplies. National Geographic News, May 29.

Bernstein, W.J. (2008). A Splendid Exchange. New York: Grove Press.

Bigman, D., & Reutlinger, S. (1979). Food price and supply stabilization: National buffer stocks and trade policies. American Journal of Agricultural Economics, 61(4), 657-667. doi. 10.2307/1239913

Birt, S. (1753). The State of the Corn Trade Considered, London: Booksellers of London and Westminster.

Bloy, M. (2002). Principles of British foreign policy 1815-1865. Access on February 27, 2015. [Retrieved from].

Bradsher, K. (2008). A drought in Australia, a global shortage of rice. New York Times, April 17.

Brutti, F. (2010). International trade and technological diversification. University of Zurich, Department of Economics Working Paper Series. [Retrieved from].

Buer, M.C. (1921). The trade depression following the Napoleonic Wars. Economica 2(2), 159-179. doi. 10.2307/2547959

Burgess, R., & Donaldson, D. (2010). Can openness mitigate the effects of weather shocks? Evidence from India’s famine era. American Economic Review, 100(2), 499-453. doi. 10.1257/aer.100.2.449

Burke, M., Hsiang. S.M., & Miguel, E.(2015). Global non-linear effect of temperature on economic production. Nature, 527, 235-239. doi. 10.1038/nature15725

Cadot, O., Carrere, C., & Strauss-Kahn, V.(2011). Export diversification: What’s behind the hump?, Review of Economic and Statistics, 93(2), 590-605. doi. 10.1162/REST_a_00078

Calabrese, J. (2012). Japan’s new energy future and the Middle East, Middle EastInstitute, June 11.

Campbell, J.L. (2004). Institutional Change and Globalization. Princeton University Press: Princeton, NJ.

CESifoDice. (2016). Economic freedom, composite index, 1995-2015. Access on June 1, 2016. [Retrieved from].

Chang, H.J. (2013). Kicking away the ladder: The ‘real’ history of free trade. In A. Shakhk (Ed.), Globalization and the Myths of Free Trade: History, Theory and Empirical Evidence, (pp.50-68). New York: Routledge.

Chavas, J. (2008). On the economics of agricultural production. Australian Journal of Agricultural and Resource Economics, 52(4), 365-380. doi. 10.1111/j.1467-8489.2008.00442.x

Clark, D.P. (2010). Vertical specialization with developed and developing countries. Journal of Developing Areas, 43(2), 327-339. doi. 10.1353/jda.0.0061

Conley, T. (2014). Australia’s China dependence: Do we need a plan B?” The Conversation, December 8, 2014.

Costanza, R, Audley, J., Borden, R., Ekins, P., Folke, C., Funtowicz, S.O., & Harris, J.(1995). Sustainable trade: a new paradigm for world welfare. Environment: Science and Policy for Sustainable Development, 37(5), 16-44. doi. 10.1080/00139157.1995.9931065

De Benedictis, L., Gallegati, M., & Massimo, T. (2007). Overall specialization and income: Countries diversify. University of Rome CIDEI Working Papers, No.73.

Debrett, J. (1800). Thoughts on the Corn-Trade. London: T. Burton.

Diamond, J. (2005). Collapse: How Societies Choose to Fail or Succeed. New York: Penguin.

Economic Times. (2016). Japan reports biggest trade surplus since 2011, Access on March 17. [Retrieved from].

Economic Times. (2012). The Nokia effect: Finland’s fortunes are affected by one firm. What about other countries?, Access on August 25, 2012. [Retrieved from].

Economist Group Limited. (2014). A troubling trajectory. The Economist, Access on December 13.

European Commission. (2016). Country report finland. SWD Staff Working, No.26/2. [Retrieved from].

Eurostat. (2012). Euro area government debt up to 90% of GDP, Oct. 24. Newsrelease, Euroindicators. Discontinued- data.

Eurozone Forecast. (2015). EYGM Ltd. Eurozone rebalancing toward broad-based recovery. Finland. Oxford Economic, June 30-31.

Evans, P. (1995). Embedded Autonomy: States and Industrial Transformation. Princeton, NJ: Princeton University Press.

Fernholz, T. (2011). FTAs Increase Trade, But Impact Can Be Hard to Measure. Nationjournal.com, July 17.

FAOSTAT. (2016). Net capital stock. Access on June 12, 2016, [Retrieved from].

Frieden, J.A. (2006). Global Capitalism: Its Rise and Fall in the Twentieth Century. New York, NY: Jeffry Frieden.

George, A. & Bennett, A.(2005). Case Studies and Theory Development in the Social Sciences. MIT Press: Cambridge, MA.

Gorodnichenko, Y., Mendoza, E.G, & Tesar, L.L. (2009). The finnish great depression: From Russia with love. Institute for the Study of Labor, April.

Grey, P. (1999). Famine, Land and Politics: British Government and Irish Society, 1843-1850. Portland, OR: Irish Academic Press.

Grieco, J.M., & Ikenberry, G.J. (2003). State Power and World Markets. New York, NY: W.W. Norton.

Grubel, H., & Lloyd, P. (1975). Intra-industry trade: the theory and measurement of International trade in different products. London, UK: Macmillan.

Gulan, A., Haavio, M., & Kilponen, J. (2014). Kiss me deadly: From finnish great depression to great recession. Bank of Finland Research Discussion Papers, No.24.

Hausmann, R., & Rodrik, D. (2003). Economic development as self-discovery, Journal of Development Economics, 72(2), 603-633. doi. 10.1016/S0304-3878(03)00124-X

Heckscher, E.F. (1919). The effect of foreign trade on the distribution of income. In E.F. Heckscher & B. Ohlin (Eds), Heckscher-Ohlin Trade Theory (Harry Flam and M. June Flanders, Trans.), Cambridge, MA: The MIT Press. (Current edition is 1991).

Helpman, E. (1981). International trade in the presence of product differentiation, economies of scale, and monopolistic competition: A Chamberlin-Heckscher-Ohlin approach, Journal of International Economics, 11(3), 305-340. doi. 10.1016/0022-1996(81)90001-5

The Heritage Foundation. (2016a). 2012 Index of economic freedom. [Retrieved from].

The Heritage Foundation. (2016b). Trade freedom. Economic data on statistics on world economy and economic freedom. Access on June 4, 2016, [Retrieved from].

Hjerppe, R. (2008). An economic history of Finland, University of Helsinki. Access on June 24, 2016. [Retrieved from].

Hummels, D., Rapoport, D., & Yi, K.M. (1998). Vertical specialization and the changing nature of world trade. Federal Reserve Bank of New York Economic Policy Review, June.

Imbs, J., & Wacziarg, R. (2000). Stages of diversification, Stanford University and London School of Business, Sept.

The International Monetary Fund & World Bank. (2015). Prospects for global trade, Access on August 4, 2017. [Retrieved from].

Jiji Press. (2012). Disaster donations top Y520 billion. The Japan Times, March 8:1.

Kalemli-Ozcan, S., Sorensen, B.E. & Yosha, O. (2003). Risk sharing and industrial specialization: Regional and international evidence, American Economic Review, 93(3), 903-918. doi. 10.1257/000282803322157151

Kennedy, D. (2012). Australia faces the end of the Big Dry, BBC News, Sydney, Access on July 28, 2017. [Retrieved from].

Kinealy, C. (1998). Peel, rotten potatoes and providence: The repeal of the Corn Laws and the Irish Famine, In A. Marrison (Ed.), Free Trade and its Reception 1815-1960 (vol 1), (pp.50-62), London, UK: Routledge.

Klinger, B., & Lederman, D. (2004). Discovery and development: An empirical exploration of ‘new’ products.” World Bank Policy Research Working Paper Series, No.3450. doi. 10.1596/1813-9450-3450

Klinger, B., & Lederman, D. (2006). Diversification, innovation, and imitation inside the global technological frontier, World Bank Policy Research Working Paper, No.3872. [Retrieved from].

Koren, M., & Tenreyro, S. (2004). Diversification and development, FED of Boston Working Papers, No.03-3. [Retrieved from].

Korgut, B., Walker, G. & Anand, J. (2002). Agency and institutions: national divergences in diversification behavior, Organization Science, 13(2), 162-178. doi. 10.1287/orsc.

Kreinin, M.E. (2010). International Economics: A Policy Approach. New York, NY: Pearson Learning Solutions.

Krugman, P.R. (1981). Intraindustry specialization and the gains from trade, Journal of Political Economy, 89(5), 959-973. doi. 10.1086/261015

Laidi, Z. (2008). How trade became geopolitics. World Policy Journal. Summer.

Lawn, B. (1801). The corn trade investigated, and the…, Salisbury, UK: J. Easton.

Leontief, W. (1953). Domestic production and foreign trade: The American capital position re-examined, Proceedings of the American Philosophical Society, 97(4), 332-349.

Linder, H.M.F.B. (1961). An Essay on Trade and Transformation. Stockholm, Sweden: Almqvist and Wicksell.

Macro Data Guide. (2016). Aggregate Indicator: Voice & Accountability, Worldwide Governance Indicators, Access on July 28, 2016. [Retrieved from].

Malthus, T.R. (1814). Observations on the Effects of the Corn Laws. New York, NY: Cosimo Classics. 2012 ed.

Meti.gov. (2014a). 2014 White paper on small and medium enterprises in Japan. Access on April 25. [Retrieved from].

Meti.gov. (2014b). Strategic energy plan. Provisional translation, [Retrieved from].

Mishkin, F.S. (2006). The Next Great Globalization. Princeton, NJ: Princeton University Press.

Nation Master. (2012). Government Statistics: Total businesses registered number (per capita) (most recent) by country, Access on October 2012, [Retrieved from].

Nelson, R.M., Belkin, P., & Jackson, J.K. (2015). The Greek debt crisis: Overview and implications for the United States. Congressional Research Service, 15, 7-5700, R44155.

North, D.C. (1990). Institutions, Institutional Change, and Economic Performance. New York, NY: Cambridge University Press.

Ohlin, B. (1933). Interregional and International Trade. Cambridge, MA: Harvard University Press.

O’Neill, P. (1996). The trend of aggregate concentration in the United States, The American Journal of Economics and Sociology, April.

OECD. (2017a). ANBERD: business enterprise R&D broken down by industry (ISIC Rev. 4). Access on June 7, 2017. [Retrieved from].

OECD. (2015a). Country risk classification, Access on Aug. 25, 2015. [Retrieved from].

OECD. (2017b). Exports/Imports. Selected Countries. Access on March 30, 2017. [Retrieved from].

OECD. (2017c). Gross domestic product. Access on March 30, 2017. [Retrieved from].

OECD. (2016a). International trade-trade in goods and services- OECD data, Access on June, 2016. [Retrieved from].

OECD. (2017d). Investment. Selected Countries. Access on March 29, 2017. [Retrieved from].

OECD. (2016b). Patents by technology. Access on June, 2016. [Retrieved from].

OECD. (2016c). Production and sales (MEI): Manufacturing production ındex. [Retrieved from].

OECD. (2015b). SDBS structural business statistics. Access on December 1, 2015. [Retrieved from].

Osterhammel, J., & Petersson, N.P. (2006). Globalization: A Short History. Princeton University Press: Princeton, NJ.

Owen, G. (2005). It takes two to trade. National Post, August: A19.

Oxford English Dictionary. (2015). Risk. Access on October 27, 2015. [Retrieved from].

Ravallion, M. (1987). Trade and stabilization: Another look at British India’s controversial food grain exports.” Explorations in Economic History, 24(4), 354-370. doi. 10.1016/0014-4983(87)90019-2

Rayment, R. (1790). The Corn-Trade of Great Britain:…” London, UK: T. Whieldon.

Reilly, B. (2002). Electoral systems for divided societies, Journal of Democracy, 13(2), 156-170. doi. 10.17226/9434

Ricardo, D. (1817). The Works and Correspondence of David Ricardo. In P. Sraffa and M.H. Dobb. (Eds.) Vol I. On the Principles of Political Economy and Taxation. Cambridge, UK: Cambridge University Press, (1951 ed.).

Saint-Paul, G. (1992). Technological choice, financial markets and economic development, European Economic Review, 36(4), 763-781. doi. 10.1016/0014-2921(92)90056-3

Salvadori, N., & Signorino, R. (2015). Defense versus opulence? An appraisal of the Malthus-Ricardo 1815 controversy on the Corn laws, History of Political Economy, 47(1), 151-184. doi. 10.1215/00182702-2847351

Samuelson, P., & Varian, H.R. (2001). The ‘new economy’ and information technology policy, University of California Berkeley, Access on July 18. [Retrieved from].

Sawyer, W.C., & Sprinkle, R.L. (2009). International Economics- 3rdEdition. Upper Saddle River, NJ: Princeton.

Schonhardt-Bailey, C. (1991). Specific factors, capital markets, portfolio diversification, and free trade: Domestic determinants of the repeal of the Corn laws, World Politics, 43(4), 545-569. doi. 10.2307/2010536

Schonhardt-Bailey, C. (2006). From the Corn Laws to Free Trade: Interests, Idea, and Institutions in Historical Perspective. Cambridge, MA: MIT Press.

Scott, D., Jr., Martin, J.D., Petty, J.W., & Keown, A.J. (1999). Basic Financial Management- 8th ed. UpperSaddle River, NJ: Prentice Hall.

Seneker, H., & Latanotis, D. (1991). Great family fortunes. The Forbes Four Hundred, 148(9), 274-296.

Shediac, R., Abouchakra, R., Moujaes, C.N., & Najjar, M.R. (2008). Economic diversification: The road to sustainable development. Booz and Company, USA. Access on May 2012. [Retrieved from].

Social Science Research Council. (2016). New voices from Japan, Access on January 2016. [Retrieved from].

Solow, R. (1956). A contribution to the theory of economic growth, American Journal of Economics, 70(1), 65-94. doi. 10.2307/1884513

Statistics Finland. (2016). The growing years of Finland’s industrial production, Access on June 21, 2016. [Retrieved from].

Stiglitz, J.E. (2006). Making Globalization Work. New York, NY: W.W. Norton.

Stolper, W.F., & Samuelson, P. (1941). Protection and real wages, Review of Economic Studies 9(1), 58-73. doi. 10.2307/2967638

Storrs, F.J. (1816). Letters on the Corn-Trade: Containing… Bristol, UK: Printed by Philip Rose.

Strategy&. (2008). Economic diversification. Access on August 12, 2008. Formerly Booz & Company. [Retrieved from].

Thirlwell, M. (2015). How dependent are Australian exports on China? A new research note. Australian Trade and Investment Commission, 16 March.

Tradingeconomics.com. (2017a). 300,000 indicators from 196 countries. Access on May 22, 2017. [Retrieved from].

Tradingeconomics.com. (2017b). United States wages and salary growth, 1960-2017. Access on June 21, 2017. [Retrieved from].

Translators on the www. (2016). Finland foreign trade, Access on June 24, 2016. [Retrieved from].

United Nations Industrial Development Organization. (2012). Diversification vs. specialization as alternative strategies for economic development: Can we settle a debate by looking at the empirical evidence? Working Paper, March. [Retrieved from].

United Nations University, UNU-WIDER. (2016). World Income Inequality Database. Access on July 28, 2016. [Retrieved from].

Vacher and Sons. (1842). Observations on the Proposed…, London, UK: Vacher and Sons, 29, Parliament St.

Vanhaute, E., Paping, R. & O’Grada, C. (2006). The European subsistence crisis of 1845-1850: a comparative perspective. IEHC 2006 Helsinki Session 123. Access on August 10, 2015, [Retrieved from].

Villarreal, A.M. (2017). U.S.-Mexico economic relations: Trends, issues, and implications, Congressional Research Service, Access on April 27. [Retrieved from].

Wacziarg, R. (2007). Stages of diversification. Commission on growth and development, workshop on global trends and challenges. Yale University, Sept. 28-29.

Westlake, W.C. (1833). Practical Remarks on the Corn Laws… London, UK: J.Ridgway.

Wiig, A., & Kolstad, I. (2012). If diversification is good, why don’t countries diversify more? The political economy of diversification in resource-rich countries, Energy Policy, 40(1), 196-203. doi. 10.1016/j.enpol.2011.09.041

Williamson, J.G. (2002). Winners and losers over two centuries of globalization. NBER Working Papers, No.9161. doi. 10.3386/w9161

Wooldridge, J.M. (2009). Introductory Econometrics: A Modern Approach-4th ed. Mason, OH: South-Western.

The World Bank. (2016a). Cereal yield (kg per hectare, 1961-2014). Access on June 19, 2016. [Retrieved from].

The World Bank. (2014). Energy Imports, net (% of energy use). Access on June 2, 2016. [Retrieved from].

The World Bank. (2016b). GDP percapita (currentUS$). Access on November 19, 2016. [Retrieved from].

The World Bank. (2017a). Global Rankings 2007: Logistics performance index. Access on January 29, 2017. [Retrieved from].

The World Bank. (2016c). Insurance and financial services (% of services exports, BoP). Access on June 3, 2016. [Retrieved from].

The World Bank. (2017b). New report links increased policy uncertainty and maturing global value chains to weakened trade growth in 2016, Access on August 4, 2017. [Retrieved from].

The World Bank. (2016d). Research and development expenditure (% of GDP). Access on July 28, 2016. [Retrieved from].

The World Bank. (2017c). Trade % of GDP, 1960-2016,” Access on March 31, 2017. [Retrieved from].

World Nuclear Association. (2016). Nuclear power in Japan. World Nuclear Association, posted June. [Retrieved from].

Yi, K. (2003). Can vertical specialization explain the growth of world trade?, The University of Chicago Press, 111(1), 52-102. doi. 10.1086/344805

Yoo-Duk, K. (2010). Intra-industry trade in an enlarged Europe: Trend of intra-industry trade in the European Union and its determinants, Korea Institute for International Economic Policy. KIEP Working Paper, No.10-02.-data.

Young, W. (1800). Corn Trade: An Examination of Certain… London, UK: S.Gosnell.

Zoellick, R. (2011). Looking beyond aid. Robert Zoellick speech given in Beijing, China, September 5.

DOI: http://dx.doi.org/10.1453/jel.v7i4.2135


  • There are currently no refbacks.


Journal of Economics Library - J. Econ. Lib. - JEL - www.kspjournals.org

ISSN: 2149-2379

Editor: jel@ksplibrary.org Secretarial: secretarial@ksplibrary.org   Istanbul - Turkey.

Copyright © KSP Library