David ricardo believed that the international trade is governed by the comparative cost advantage rather than the absolute cost advantage. Ricardos theory is broadly regarded as one of the most powerful yet counterintuitive insights in economics, hence, the theory implies that comparative advantage rather than absolute advantage is. Pdf this paper argues that ricardos discovery of the law of comparative advantage probably occurred in october 1816. The goal of this paper is to assess the empirical performance of ricardo s ideas. Absolute advantage refers to the uncontested superiority of a. Smiths and ricardo s models it is good idea to illus1.
You can hire an hour of babysitting services for less than you would make doing an hour of plumbing. David ricardos discovery of comparative advantage university of. Comparative advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors. The term comparative means relative not necessarily absolute. By arnaud costinot and dave donaldson the anecdote is famous. This paper argues that ricardo s discovery of the law of comparative advantage probably occurred in october 1816.
This report will discuss the complications and advantages of the comparative advantage, david ricardo s background and theories, the comparative advantages effect on the economy, the political aspect of the theory of comparative advantage, and how it has developed over time. Absolute advantage and comparative advantage are two concepts in economics and international trade. The ricardo effect served as a red herring to cause scholars to possibly misread. Suppose, as ricardo s theory of comparative advantage. Ruffin1 abstract this paper argues that ricardo s discovery of the law of comparative advantage probably occurred in october 1816. The principle of comparative advantage and the gains from trade thus appear as. To bring ricardo s ideas to the data, one must overcome a key empirical challenge. Pdf david ricardos discovery of comparative advantage. A country will specialise in that line of production in which it has a greater relative or comparative advantage in costs than other countries and will depend upon imports from abroad of all such commodities. David ricardos theory of comparative advantage and its. Ricardo s theory of comparative advantage is mathematically correct, not that it is empirically valid. Comparative advantage is what you do best while also giving up the least. This paper argues that ricardos discovery of the law of comparative advantage probably occurred in october 1816.