If signifies that country B has less comparative disadvantage in the production of Y commodity. David Ricardo 's Theory Of Comparative Advantage 1504 Words | 7 Pages. At this stage, the rents are high. Between 1500 and 1750 most economists advocated Mercantilism which promoted the idea of international trade for the purpose of earning bullion by running a trade surplus with other countries. Ricardo shows how the rate of profit goes on falling as more and more capital is accumulated and invested. It implies that output changes exactly in the same ratio in which the factor inputs are varied. The comparative differences in costs can be measured as: The Table 2.3 satisfies the condition specified for comparative difference in costs; In case a1/a2 = a3/a4, there are equal differences in costs and there is no possibility of trade between the two countries. Therefore, as a result of the rise in the prices of the food-grains and thereby the rise of the wages of labourers will reduce the surplus or profits made by the capitalists in the industrial sector. Adam Smith first alluded to the concept of absolute advantage as the basis for international trade in 1776, in The Wealth of Nations: . That the availability of food-grain surpluses or wage-goods serves as a constraint on the growth of industrial output and employment has now been well recognised. Disclaimer Copyright, Share Your Knowledge
But availability of wage-goods surpluses proves a constraint on the growth of industrial sector. Besides diminishing returns to labour in agriculture, the other fact emphasised by Ricardo, like other classical economists, is that wages were determined by minimum subsistence level of the workers. In 1809 he wrote that England's inflation was the result of the Bank of England's propensity to issue excess bank notes. Suppose OW is the minimum subsistence level of wages in real terms. David Ricardo was a political economist hailing from Britain. He suggested that industry specialization combined with free international trade always produces positive results. His ideas are embodied in his book, The Principles of Political Economy and Taxation (1817) and the many letters that he addressed to contemporary economists. Disclaimer Copyright, Share Your Knowledge
If country A gives up OB quantity of Y and diverts resources to the production of X, it can produce OC1 quantity of X, which is more than OB1. It has tended to displace labour. Not only has that, Ricardo’s conjectures about the relative share of labour, capitalists and landlords not been proved to be correct. Suppose, as Ricardo’s theory … If trade takes place and two countries agree to exchange 1 unit of X for 1 unit of Y, the gain from trade for country A amounts to 0.20 units of Y for each unit of X. (xi) Trade between two countries takes place on the basis of barter. Ricardo was therefore against imposing any levies, taxes and tariffs on inputs which raises the cost of production and lowers profits and thus serves as disincentive to make investment. If the wage rate rises to OW’ when the capital stock is OK3, labour force OL3 would be employed and the net revenue or profits of the capitalist would be reduced to M3W’G. (iv) Production function is homogeneous of the first degree. The intra-marginal doses of labour employed would produce surplus over the expenses incurred on them, which is the source of capital, that is, the wage fund that will be used for employing labour in future for further production. The rise in prices of food-grains will bring about the increase in the wage rate in the industrial sector. (v) Labour is the only factor of production and the cost of producing a commodity is expressed in labour units. With "comparative advantage" Ricardo argued in favour of industry specialisation and free trade. Ricardo first gained notice among economists over the "bullion controversy." He created the “Theory … But workers engaged in building up of capital stock must be paid in real terms, i.e., in food-grains and other wage goods, or corn as Ricardo called it. If OW represents the minimum level of subsistence wage which will be paid to the workers, then OWTL would be the share of labour (i.e., total wages bill) in the agricultural output produced. 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