David Ricardo
Hello, readers. I am David Ricardo, perhaps one of the 'classic' economists, along with Adam Smith, also known as the Father of Economic, and my friends - Jeremy Bentham and Thomas Malthus. My well-known theory is the Comparative Advantages, which goes against Adam Smith's Absolute Advantages. Other notable theories by me includes the theory of 'wealth and rent' and 'iron law of change'.
Born in London, England, I was the third child in my family. My father was a very successful stockbroker, but my father disowned me when I was 21 because of some religion conflict I had. Without the support of my family, I had to start my own business, and thanks to my father, I became a great stockbroker too.
18 June 1815, the Battle of Waterloo occurred and the French fought the British. This was a perfect chance to use my experience as a stockbroker to earn money. Using the theory of 'conflict of interests', I bet the British would won and the French would lose, and started investing on British securities, created false market panic and my calculation were right . I earned around 600,000 pounds. It was a really good day for me. But almost at the same time, I retired from the Exchange at 43.
After retirement, I had a family, with eight children. Two of my sons became members of parliament, I was very proud of them.
I remembered when I had my very first contact with economic in 1799. During a vacation to a English resort, I read Adam Smith's "The Wealth of Nations". I wrote my first economic article when I was 37. In 1819, I took a seat in the House of Commons, representing an Irish rotten borough, also known as Portarlington. Thanks to my friend Richard 'Conversation' Sharp, I managed to hold the seat.
Sadly, I passed away at the age of 51 from an infection in the ear and it spread into my brain. :'(
I had written a very book which was "On the Principles of Political Economy and Taxation"
Born in London, England, I was the third child in my family. My father was a very successful stockbroker, but my father disowned me when I was 21 because of some religion conflict I had. Without the support of my family, I had to start my own business, and thanks to my father, I became a great stockbroker too.
18 June 1815, the Battle of Waterloo occurred and the French fought the British. This was a perfect chance to use my experience as a stockbroker to earn money. Using the theory of 'conflict of interests', I bet the British would won and the French would lose, and started investing on British securities, created false market panic and my calculation were right . I earned around 600,000 pounds. It was a really good day for me. But almost at the same time, I retired from the Exchange at 43.
After retirement, I had a family, with eight children. Two of my sons became members of parliament, I was very proud of them.
I remembered when I had my very first contact with economic in 1799. During a vacation to a English resort, I read Adam Smith's "The Wealth of Nations". I wrote my first economic article when I was 37. In 1819, I took a seat in the House of Commons, representing an Irish rotten borough, also known as Portarlington. Thanks to my friend Richard 'Conversation' Sharp, I managed to hold the seat.
Sadly, I passed away at the age of 51 from an infection in the ear and it spread into my brain. :'(
I had written a very book which was "On the Principles of Political Economy and Taxation"
Ricardo's Comparative Advantages vs Smith's Absolute Advantages
According Smith's theory about how specialisation should work, he said that a country is more efficient at producing the same goods than the others should produce the goods.. This is known as 'Absolute Advantage'. While I agreed some aspects of his ideas, but he did not consider those countries which has less advantages compared to others. So if we use Smith's Absolute Advantages, many countries could not specialise because they have less 'advantages'. My theory is a lot better compared to Smith's theory.
Comparative Advantages suggests that countries should specialize in the production of whatever has the lowest opportunity cost. Countries that specialize produce more efficiently and should trade their output with other countries to enjoy a higher standard of living.
Comparative Advantages suggests that countries should specialize in the production of whatever has the lowest opportunity cost. Countries that specialize produce more efficiently and should trade their output with other countries to enjoy a higher standard of living.
Example of Comparative Advantages
Britain uses 100 people to produce cloth, 110 people to produce wine
Portugal use 90 people to produce cloth, 80 people to produce wine
Portugal use 90 people to produce cloth, 80 people to produce wine
Mr. Smith would say Portugal should produce both cloth and wine, because they used less labors to produce the same quantity of cloth and wine.But according to my theory, Britain should focus on cloth and Portugal should focus on wine. Why do I say this? Let's find out
Remember - Comparative Advantage means each country should specialize and export these goods that it can produce at relatively lower cost. Relative efficiency is what mattered.
The equation of comparative advantage is ( what give up/what is made).
If Britain gave up cloth for wine, (100/110), they will lose 10/11 of cloth.
If Portugal gave up cloth for wine (90/80), they will lose 9/8 of cloth.
What does this mean? Britain loses less cloth compared to Portugal, therefore Britain should focus on cloth, they have less opportunity cost to lose
If Britain gave up wine for cloth (110/100), they will lose 11/10 of wine
If Portugal gave up wine for cloth (80/90), they will lose 8/9 of wine.
What does this mean? Portugal loses less wine compared to Britain, therefore Portugal should focus on wine, since less opportunity cost to lose.
If Britain gave up cloth for wine, (100/110), they will lose 10/11 of cloth.
If Portugal gave up cloth for wine (90/80), they will lose 9/8 of cloth.
What does this mean? Britain loses less cloth compared to Portugal, therefore Britain should focus on cloth, they have less opportunity cost to lose
If Britain gave up wine for cloth (110/100), they will lose 11/10 of wine
If Portugal gave up wine for cloth (80/90), they will lose 8/9 of wine.
What does this mean? Portugal loses less wine compared to Britain, therefore Portugal should focus on wine, since less opportunity cost to lose.
Why is Comparative Advantage a good thing?
Comparative Advantage theory helped many countries that do not have ‘absolute’ advantages, because they may have a better efficiency rate of making a certain product even though they have less labor/resources than others. Specialize in goods could help a country to sell more and increase the income of nation.
Benefit of comparative advantage is if a country specialize in products which is more efficient, the total output and income may increased. More Export means more money, and more money means more import from other countries to develop.
For companies, comparative advantage can be a good start for them, because it explains how a firm can increase the profit by focusing a certain product that can be produced more efficiently, and may help the company to overtake its competitor.
Benefit of comparative advantage is if a country specialize in products which is more efficient, the total output and income may increased. More Export means more money, and more money means more import from other countries to develop.
For companies, comparative advantage can be a good start for them, because it explains how a firm can increase the profit by focusing a certain product that can be produced more efficiently, and may help the company to overtake its competitor.
Iron law of wages
My "iron law of wages" suggests that - if parents' wage increase, they will probably get more children. When the children grow up, they will enter the market, and with more children, the wages will get lower. Then the workers will get less children. The process would recycle again once the wage start to increase. The real wage never change, so to increase standard of living. The only solution is to limit the number of children.
A video about my theories :P
Enjoy the music!
Comment down here...... :)
Dear Mr. Ricardo, I think your ear infection may have spread to your brain a bit sooner than you let on. Just because you become rich off speculation, don't think that this makes you a great economist. If we all abided by comparative advantage wouldn't time need to stand still? - Paul Krugman (nobel winner in economics, now that makes ME a great economist)
Dear Mr Krugman, I am one of the founder of Economic, and one of the classical economist according to many people today. I found Economic, and without me, you would not have your Nobel Prize today. So be grateful to the founders, and have a great day :). - David Ricardo, Founder of Economic, now that makes ME a better Economist :)
Dear Mr Ricardo, I do not think your theory is realistic firstly because all countries produce at least one goods and services that other countries can produce more efficiently thus why would the countries import the goods or services when they can produce more efficiently in domestic? Secondly, no country specializes in the production and export of a single product or service if they do, the importing countries might use this to reduce the price of the goods or services as they know that the country would not be able to survive without exporting that specialized goods or services.- Adam Smith
Dear Mr Smith, I was just giving an example, in fact a country should specialise in more than a product. - David Ricardo
Dear Mr Ricardo, I think your theory of comparative advantage is useful, but your explanation for the example of comparative advantages is wrong. You made double error. The first error is: if Britain gave up cloth for wine, what they will lose is not 10/11 of cloth, but 11/10 of cloth; if Portugal gave up cloth for wine, what they will lose is not 9/8 of cloth, but 8/9 of cloth. The second error is: if Britain loses less cloth compared to Portugal, focus of Britain should be not cloth, but wine. As you made double error, the final answer is correct, but the process is wrong. This is the same for wine: since Britain will lose 10/11 of wine and Portugal will lose 9/8 of wine when they gave up wine for cloth, Portugal loses more wine compared to Britain, and therefore Portugal should focus on wine as it has more opportunity cost to lose.
- Arthur Pigou
Dear Mr Ricardo, I do not think your theory is realistic firstly because all countries produce at least one goods and services that other countries can produce more efficiently thus why would the countries import the goods or services when they can produce more efficiently in domestic? Secondly, no country specializes in the production and export of a single product or service if they do, the importing countries might use this to reduce the price of the goods or services as they know that the country would not be able to survive without exporting that specialized goods or services.- Adam Smith
Dear Mr Smith, I was just giving an example, in fact a country should specialise in more than a product. - David Ricardo
Dear Mr Ricardo, I think your theory of comparative advantage is useful, but your explanation for the example of comparative advantages is wrong. You made double error. The first error is: if Britain gave up cloth for wine, what they will lose is not 10/11 of cloth, but 11/10 of cloth; if Portugal gave up cloth for wine, what they will lose is not 9/8 of cloth, but 8/9 of cloth. The second error is: if Britain loses less cloth compared to Portugal, focus of Britain should be not cloth, but wine. As you made double error, the final answer is correct, but the process is wrong. This is the same for wine: since Britain will lose 10/11 of wine and Portugal will lose 9/8 of wine when they gave up wine for cloth, Portugal loses more wine compared to Britain, and therefore Portugal should focus on wine as it has more opportunity cost to lose.
- Arthur Pigou
Dear Mr Pigou, the formula for comparative advantage is (WHAT IS GIVEN UP/WHAT IS MADE), I think you are confused, please go back and read my example again. - David Ricardo