The theory of comparative advantages of David Ricardo

The theory of comparative advantages of David Ricardo

David Ricardo's research in the field ofinternational trade created the prerequisites for its further development. The economist has proved that it makes sense even in the case when the country does not have advantages in producing at least some kind of products. He showed that what is important here is not so much the commodity itself, as the ratio of costs in its production. If these differences exist, this means that the country has comparative advantages over others and can easily engage in the production of this type of product. It is on its manufacture and export that it should specialize.

The theory of comparative advantages of David Ricardo is based on a number of assumptions. It proceeds from the fact that:

- two countries have two goods;

- all production costs are only wages, which is also the same for all professions and qualifications;

- there is a possibility of free trade between countries;

- there are no expenses for transport;

- the level of wages that is not the same in different countries is ignored.

How does the theory of comparative advantage operate,Ricardo showed the example of trade of two European countries with cloth and wine. On economic indicators, Portugal at that time surpassed Britain in the production of both. If you proceed only from this, you can decide that for her there was no point in trading with England. However, David Ricardo, developing the ideas of Adam Smith, went further. He developed a theory of comparative advantages. Its essence lies in the fact that it is profitable for a country to trade on the international market with products that it produces with minimal costs in comparison with the output of other goods.

So, both countries make cloth, butPortugal is more profitable, given the size of costs, to produce wine and exchange it for English cloth. Britain, too, will not remain offended. She will receive wine at a more favorable price, at a lower cost than if she herself was engaged in its manufacture and sale.

However, it must be taken into account that this model is toosimplified. In practice, the increase in production is inevitably associated with an increase in marginal costs. It also happens that the further release of one unit of goods forces us to abandon the increase in production of others.

And still, if the theory of comparativeadvantages will be the basis of specialization, it will still ensure the growth of a certain type of products and help to use the world's resources more effectively. It will also contribute to the economy of the labor force in the country - despite the fact that the volume of goods produced in it will remain the same or even increase. The followers of David Ricardo pointed to the fact that even with the difference in payment, the theory of comparative advantages will not undergo significant changes.

Thus, she advises to import into the countrygoods that are produced at higher costs than those that are exported. Modern economists have proved that this theory really works. Moreover, it is effective for any number of member countries and goods, and not just for two.

The theory of comparative advantages has one moreundoubted dignity: it proves that trade between different states is beneficial to both sides. Of course, someone will get less profit, and someone more, but everyone will be satisfied with the result. This is the main achievement of the theory of David Ricardo. She also confirmed the idea of ‚Äč‚ÄčAdam Smith about the benefit of the division of labor for all its participants, without exception.

True, this theory also has one drawback: it does not explain why these very comparative advantages are still developing.

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