week 1: 2. classical school (1776-1871): David Ricardo 2.0 (Discussion…
week 1: 2. classical school (1776-1871):
David Ricardo 2.0
Theory of international trade 2.
•Ricardo: “Principle that determines relatives prices in a single country does not hold in the context of international exchange.”
•Solution comes later from John Stuart Mill.
•Tension between Ricardo’s labor theory of value and theory of comparative advantage!
→For E and P to have an incentive to specialize in wine and cloth, the price of wine relative to cloth must deviate from the relative labor content in each of the countries!
→No mentioning of how gains from trade are split.
Ricardo on theory of market gluts
•Temporary glut can occur, but normally full production and employment prevail
→nowadays known as Say’s law of markets
•Supply creates its own demand
Resource allocation between production process of various commodities
Capitalists’ savings imply investment expenditures which create demand for goods
→Effective demand is always sufficient.
Ricardo on economic policy
: Abolish Corn Laws
Such that population growth does not come at a costs of
lower economic growth:
Population growth-->Food production up (diminishing returns) costs increase-->
(geschrapt: abolishing corn laws --> allow imports)
food prices increasewages increaseprofits decreasecapital accumulation decreaseslower economic growth
Such that international trade – and the associated gains – are no longer restricted.
Discussion David Ricardo Today
Law of diminishing returns
Overemphasize law of diminishing returns technological innovations increased output
Land has only a single use
with multiple competing uses, opportunity costs come in, and hence rent is part of production cost :
Theory of comparative advantage