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:
- Such that international trade – and the associated gains – are no longer restricted.
Population growth-->Food production up (diminishing returns) costs increase--> (geschrapt: abolishing corn laws --> allow imports) food prices increasewages increaseprofits decreasecapital accumulation decreaseslower economic growth
Discussion David Ricardo Today
Law of diminishing returns
Overemphasize law of diminishing returns technological innovations increased output
Marginal analysis
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