Abstract
For centuries prior to the late eighteenth century, trade was driven by the concept of mercantilism, whereby countries gain specie (precious metals) through exports, and essentially lose by importing, and a net positive balance of trade was sought by all. Adam Smith introduced the notion of absolute advantage, whereby countries could gain by specializing in the goods they produced less expensively than the rest of the world and trading openly. David Ricardo’s concept of comparative advantage took this idea one step further: countries needn’t be the cheapest producer, only the most efficient with respect to the opportunity cost to produce their goods. Ricardo showed that between two trading countries, each will always by mathematical identity have a comparative advantage in something. Ricardo’s restricting assumptions are detailed; these will be relaxed in later chapters.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
David Ricardo explained his theory of comparative advantage using a two-country (England and Portugal), two-commodity (wine and cloth) example. We will examine the two-country, two-commodity model in this chapter.
- 2.
David Hume’s 1752 essay “Of Money” may be readily found online, including at http://www.econlib.org/library/LFBooks/Hume/hmMPL26.html#Part II, Essay III, OF MONEY. The crux of his argument: “It seems a maxim almost self-evident, that the prices of every thing depend on the proportion between commodities and money, and that any considerable alteration on either has the same effect, either of heightening or lowering the price.”
- 3.
At this point, we assume that the labor force is identical in Countries A and B and that factors such as transportation costs, infrastructure quality, and labor skills do not complicate matters. Later, as we ratchet-up our sophistication, we will bring in real-world elements, but for now, we concentrate on the pure bedrock theory.
- 4.
The exception being identical factor requirements to produce the two goods in each country (aLx = bLx and aLy = bLy). We explore this condition in Chap. 3.
- 5.
Ricardo’s model essentially held that the ratio of capital to labor was the same across industries in a given country. This has the effect of rendering capital as an irrelevant factor. Further, under the “labor theory of value” prevalent in Ricardo’s day and to which he subscribed, the value of capital was determined by the amount of labor that went into creating it – therefore, we might say that capital was essentially a pass-through input representing additional, stored labor. The Ricardian model of trade was later expanded to explicitly include two distinct inputs, most thoroughly by Hecksher and Ohlin (see Chap. 5); we employ a two-input model as our basic framework.
- 6.
As noted our basic Ricardian model assumes only two factors of production, labor (L) and capital (K). We discuss the relaxing of this assumption in Chap. 5.
- 7.
Capital here is assumed to be quantifiable into discrete units. We can conceive of a “unit” of capital to represent a set of productive assets of a given value.
- 8.
Please refer to footnote 5.
- 9.
The assignment is to “click on” the underlined passage—your answer should provide, in a few sentences, whatever context and explanations are necessary in order to clarify its meaning to one not as versed as you in international trade theory!
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2014 Springer Science+Business Media New York
About this chapter
Cite this chapter
Langdana, F., Murphy, P.T. (2014). The Origins of International Trade Theory. In: International Trade and Global Macropolicy. Springer Texts in Business and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-1635-7_2
Download citation
DOI: https://doi.org/10.1007/978-1-4614-1635-7_2
Published:
Publisher Name: Springer, New York, NY
Print ISBN: 978-1-4614-1634-0
Online ISBN: 978-1-4614-1635-7
eBook Packages: Business and EconomicsEconomics and Finance (R0)