History Economic Analysis

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Ricardo’s Comparative Advantage

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David Ricardo, the early nineteenth-century British economist solved the problem of the theory of absolute advantage, by developing the theory of comparative advantage. Absolute advantage suggests that no trade would occur if one country has an absolute advantage over both products. The differences between absolute and comparative advantage theories are subtle. Absolute advantage looks at absolute productivity differences, comparative advantage looks at relative productivity differences. Take Australia, and Japan again as examples, this time Australia is better than Japan at producing both products computers and wine, and only one factor of production, labor. Australia produces 6 computers for every 4 bottles of wine, and Japan produces 5 computers for every 1 bottle of wine. Absolute advantage suggests that no trade should occur, because Australia is more productive than Japan in producing both goods. The theory of comparative advantage, suggests that trade should still occur, as Australia is comparatively better than Japan in wine production, whereas Japan is comparatively better than Australia in the production of computers. Economists use the term comparative advantage when describing the opportunity cost of two producers. The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.
Comparative Advantage The theory of comparative advantage, states that a country should produce and export those goods and services for which it is relatively more productive than are other countries and import those goods and services for which other countries are relatively more productive than it is.

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David Ricardo’s theory of International Trade
(http://www.dallasfed.org/research/ei/ei0402.html)

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- Born sephardic jew in London in 1772 - made parents really mad when he married a quaker. But still he succeeded as a stockbroker, left with no money problems, he thus had plenty of time to pursue economics.
- 1st major work in economics, The High Price of Bullion, a Proof of the Depreciation of Bank Notes, published in 1810 - making his name known among politicians needing economic advice.
- The government report’s conclusion—that the inflation then occurring in England was the result of too many paper banknotes being created—was Ricardo’s own claim in his pamphlet.
- He came into contact with James Mill and Thomas Robert Malthus. Mill became Ricardo’s mentor.
- 1814 - retired from business
- 1815 - published his next major work in economics, Essay on the Influence of a Low Price of Corn on the Profits of Stock.