David Ricardo
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View David Ricardo as PDF for free.
More details
- Words: 820
- Pages: 7
David Ricardo
April 18, 1772 — September 11, 1823
Two of the basic questions the theory of international trade has to answer are: (1)What determines the pattern of trade? (2)Who gains from trade? Economists do have answers to these questions –one that go back 194 years-in the theories of comparative advantage. These theories, formulated around 1815, are usually connected with the name of David Ricardo. The original description of the idea can be found in “an Essay on the External Corn Trade” by Robert Torrens in 1815.David Ricardo formalized the idea using a compelling, yet simple, numerical example in
his 1817 book titled, On the Principles of Political Economy and Taxation. The idea appeared again in James Mill's “Elements of Political Economy” in 1821. Finally, the concept became a key feature of international political economy upon the publication of “Principles of Political Economy” by John Stuart Mill in 1848.Before exploring the basic theory of comparative advantage and gains from trade, lets us look at its historical background: The economic doctrine that prevailed during the first two centuries of the development of the modern nation-state –the seventeenth and eighteenth centuries – was mercantilism. The doctrine of mercantilism had many modern features: (1)It was highly nationalistic, viewing national interest as of prime interest (2)It favored regulations and planning of economic activity (3)It generally viewed foreign trade with suspicion
One of the most influential writers of mercantilism was Thomas Munn (15711641).The most important way a nation could grow rich, according to the doctrine of mercantilism was by acquiring precious metals, especially gold. Exports were viewed favorably as long as they brought in gold, but imports were viewed with apprehension, as depriving the country of its true source of richness –precious metals. It was against this background that classical economics was developed. There is relevance of mercantilism in today’s world that is reflected by the trade disputes between different countries. David Ricardo and the theory of comparative advantage: The question is if one country is productive than another country in all lines of production is it still beneficial to trade? The answer to this question, according to David Ricardo is yes, as long as that country
is not equally less productive in all lines of production. The original Ricardo model: Ricardo used England and Portugal to illustrate the concept of comparative advantage. The two goods that they produced were wine and cloth, with Portugal assumed to be productive in making both wine and cloth. According to this model, Portugal has absolute advantage in producing both commodities. The costs associated with production of the two commodities in these two countries are given in the following table: Table 1: Labor cost of production (in hours) Country Wine Cloth Portugal 80 90 England 120 100 Table 2: Opportunity cost of production Country Wine Cloth
Portugal England
80/90 120/100
90/80 100/120
According to the table, Portugal has a lower opportunity cost in producing wine, while England has a lower opportunity cost in producing cloth. Thus, Portugal has a comparative advantage in the production of wine and England has a comparative advantage in production of cloth. Gains from trade: A classic example is trade in P.O.W camp trade during world II. The modern version: The modern version of Ricardo model assumes that there are two countries producing two goods using one factor of production, usually labor. The model is a general equilibrium model and all markets are perfectly competitive. The goods produced are assumed to be homogenous across firms and countries. Labor is always fully employed. There is no transportation cost. Labor is
homogenous and mobile within a country. The international trade is solely due to international differences in the productivity of labor. The labor and goods markets are assumed to be perfectly competitive in both countries. The model only considers the supply side of the economy.
Limitations of the Ricardo model: (1)The Ricardian model predicts an extreme degree of specialization that we do not observe in the real world. (2) The Ricardian model assumes away the effects of international trade on income distribution within countries. (3)The Ricardian model allows no role for differences in resources as a cause of trade, thus missing the important aspect of trading system. (4) The Ricardian model neglects the role of economies of scale as a cause of trade, which
leaves it unable to explain large trade flows between apparently similar countries. Opponents of free trade point out that globalized communications and transportation unavailable in Ricardo’s time invalidate the assumption of capital mobility and cause capital to gravitate toward absolute advantage. It is argued that comparative advantage may reduce economic diversity to risky levels. Focusing on few narrow products also increase risk and instability. The principle of diversity in personal finance may also apply in a national level. References: Salvatore, Dominick, International Economics, eighth edition, John Wiley & Sons, Inc, 2004 Sodersten, Bo & Geoffrey reed, International economics, third edition, 1994 http://internationalecon.com/Trade/Tch40/T40 -0.php
April 18, 1772 — September 11, 1823
Two of the basic questions the theory of international trade has to answer are: (1)What determines the pattern of trade? (2)Who gains from trade? Economists do have answers to these questions –one that go back 194 years-in the theories of comparative advantage. These theories, formulated around 1815, are usually connected with the name of David Ricardo. The original description of the idea can be found in “an Essay on the External Corn Trade” by Robert Torrens in 1815.David Ricardo formalized the idea using a compelling, yet simple, numerical example in
his 1817 book titled, On the Principles of Political Economy and Taxation. The idea appeared again in James Mill's “Elements of Political Economy” in 1821. Finally, the concept became a key feature of international political economy upon the publication of “Principles of Political Economy” by John Stuart Mill in 1848.Before exploring the basic theory of comparative advantage and gains from trade, lets us look at its historical background: The economic doctrine that prevailed during the first two centuries of the development of the modern nation-state –the seventeenth and eighteenth centuries – was mercantilism. The doctrine of mercantilism had many modern features: (1)It was highly nationalistic, viewing national interest as of prime interest (2)It favored regulations and planning of economic activity (3)It generally viewed foreign trade with suspicion
One of the most influential writers of mercantilism was Thomas Munn (15711641).The most important way a nation could grow rich, according to the doctrine of mercantilism was by acquiring precious metals, especially gold. Exports were viewed favorably as long as they brought in gold, but imports were viewed with apprehension, as depriving the country of its true source of richness –precious metals. It was against this background that classical economics was developed. There is relevance of mercantilism in today’s world that is reflected by the trade disputes between different countries. David Ricardo and the theory of comparative advantage: The question is if one country is productive than another country in all lines of production is it still beneficial to trade? The answer to this question, according to David Ricardo is yes, as long as that country
is not equally less productive in all lines of production. The original Ricardo model: Ricardo used England and Portugal to illustrate the concept of comparative advantage. The two goods that they produced were wine and cloth, with Portugal assumed to be productive in making both wine and cloth. According to this model, Portugal has absolute advantage in producing both commodities. The costs associated with production of the two commodities in these two countries are given in the following table: Table 1: Labor cost of production (in hours) Country Wine Cloth Portugal 80 90 England 120 100 Table 2: Opportunity cost of production Country Wine Cloth
Portugal England
80/90 120/100
90/80 100/120
According to the table, Portugal has a lower opportunity cost in producing wine, while England has a lower opportunity cost in producing cloth. Thus, Portugal has a comparative advantage in the production of wine and England has a comparative advantage in production of cloth. Gains from trade: A classic example is trade in P.O.W camp trade during world II. The modern version: The modern version of Ricardo model assumes that there are two countries producing two goods using one factor of production, usually labor. The model is a general equilibrium model and all markets are perfectly competitive. The goods produced are assumed to be homogenous across firms and countries. Labor is always fully employed. There is no transportation cost. Labor is
homogenous and mobile within a country. The international trade is solely due to international differences in the productivity of labor. The labor and goods markets are assumed to be perfectly competitive in both countries. The model only considers the supply side of the economy.
Limitations of the Ricardo model: (1)The Ricardian model predicts an extreme degree of specialization that we do not observe in the real world. (2) The Ricardian model assumes away the effects of international trade on income distribution within countries. (3)The Ricardian model allows no role for differences in resources as a cause of trade, thus missing the important aspect of trading system. (4) The Ricardian model neglects the role of economies of scale as a cause of trade, which
leaves it unable to explain large trade flows between apparently similar countries. Opponents of free trade point out that globalized communications and transportation unavailable in Ricardo’s time invalidate the assumption of capital mobility and cause capital to gravitate toward absolute advantage. It is argued that comparative advantage may reduce economic diversity to risky levels. Focusing on few narrow products also increase risk and instability. The principle of diversity in personal finance may also apply in a national level. References: Salvatore, Dominick, International Economics, eighth edition, John Wiley & Sons, Inc, 2004 Sodersten, Bo & Geoffrey reed, International economics, third edition, 1994 http://internationalecon.com/Trade/Tch40/T40 -0.php
Related Documents
David Ricardo
June 2020 9
Ricardo
April 2020 34
Ricardo
November 2019 37
Ricardo
October 2019 47
Paragraph On Adam Smith And David Ricardo
June 2020 3