David Ricardo and the Law of Comparative Advantages

In: Business and Management

Submitted By dcrf
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For almost three centuries, since 1500 until 1776 Europe lived under the grasp of the mercantilistic economic doctrine. Mercantilism and its proponent argued that a country’s wealth was only as great as the quantity of precious materials it amassed. Due to its zero sum nature, as growth was dependant on the hoarding of finite materials, a country’s gain was always translated by another’s loss. As it may be perceived this was a system that encouraged the prevalence of trade disputes and war between nations instead of peaceful cooperation between them. In 1776 an
English academic and philosopher published a book that broke through will all economic assumptions held to be true at the time, and advocated for a completely different system. His name was Adam Smith and his work became known as “An Inquiry into the Nature and Causes of the
Wealth of Nations”. Adam Smith began by disproving the mercantilistic notion of trade protectionism where exports were maximised in detriment of heavy restrictions on imports.
According to Smith, international trade could in fact be beneficial to all participants if each country would specialise in the production of goods where it had an absolute advantage in terms of costs.
By producing a good cheaper than everyone else and by importing others, a country could immensely gain from international trade. Although revolutionary, Smith’s theory of absolute advantages was not free from flaws. In fact if a country didn't have such advantage in producing a given good it wouldn't have access to trade, or in another words, trade wouldn't occur if country A couldn't be the most efficient in producing good B. In this context and in attempt to improve Smiths’ theory, David Ricardo a British political economist of Portuguese origin, introduced the theory of comparative advantages. In sum Ricardo argued that even if a country didn't have…...

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