David Ricardo was one of the most significant of the classical economists, along with Thomas Malthus and Adam Smith. The most talked about of his theories is the theory of comparative advantage.
David Ricardo (18 April 1772 – 11 September 1823) was an English political economist, often credited with systematizing economics. He was one of the most significant of the classical economists, along with Thomas Malthus and Adam Smith.
Perhaps most important of his contributions was the theory of comparative advantage, a fundamental argument in favor of free trade between countries and specialization among individuals. Ricardo argued that there is a mutual benefit of trade (or exchange) even if one party (eg resource-rich country, highly educated) is more productive in all possible areas than its trading partners counterpart sector (eg resource-poor countries, unskilled workers), as long as the individual concentrates on the activities in which it has the benefit of relative productivity.
The theory of comparative advantage was developed by David Ricardo, who in 1817 came up with a crucial theory of the benefits of countries trading with each other. It is also the theory David Ricardo is best known for.
As an example, we can say that an American workers can produce 2 tons of chicken per. month – and that a Polish worker can produce 3 tons of chicken per. month. In other words, a worker in the USA can only produce a quantity corresponding to 67% of what a worker from Poland can produce in the same period. But when it comes to steel, the American worker can only produce 2 tons per. month, while the Polish worker can produce 8 tons. This means that the American worker can only produce 25% of what the worker from Poland can in the same period. In such a case, we can talk about the USA having a comparative advantage in producing chicken.
A country has a comparative advantage where it is least likely to produce a commodity. Comparative = relative, relative. Even if a country does not have a single absolute advantage, it will always have some areas where it is relatively efficient to produce.
The theory of comparative advantages explained above makes a number of important assumptions:
- There are no transportation costs.
- Costs are constant and there are no economies of scale.
- The theory assumes that goods are homogeneous (ie identical).
- Elements of production are assumed to be completely mobile.
- There are no tariffs or other barriers to trade.
- There is perfect knowledge so that all buyers and sellers know where the cheapest goods can be found – internationally.