DAVID RICARDO

INTERNATIONAL RELATIONS AND THE

YOUR SPECIFIC PROBLEMS

ANA CARDOSO

Student Nº 21150138

SANDRA GONÇALVES

Student No. 21120601

Catarina Ferreira

Student No. 20101020

SUMMARY: This paper addresses the life and work of David Ricardo, considered a
great name of Classical Political Economy. Being the focal point of this work the
theories that David Ricardo developed such as the theory of value, the theory of
distribution of income and the theory of International Trade presents an example
explanatory of the Principle of Comparative Advantage.

POLYTECHNIC INSTITUTE OF COIMBRA

Coimbra Higher Institute of Engineering

DEPARTMENT OF CIVIL ENGINEERING

MAIO DE 2007

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INDEX:

1. BIOGRAPHY 3

2. THEORIES OF DAVID RICARDO 4

2.1 Theory of value - labor 5

2.2 Theory of distribution / Theory of income 5

2.3 Theory of International Trade (Ricardian Model) 6

2.3.1 The principle of comparative advantage and its analysis

according to David Ricardo 7

2.3.2 Critique of the theory of comparative advantages

Ricardian Model and Protectionism 8

3. INTERNATIONAL TRADE 8

3.1 Regulation of international trade 9

3.2 Risks of international trade 9

4. KEY CONCEPTS 11

5. BIBLIOGRAPHY 11

6. CONSULTED SITES 11

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 1. BIOGRAPHY

Figure 1: David Ricardo (1772 -1823)

David Ricardo was born in London on April 18, 1772. He was the third of 17 children of
a middle-class Dutch family, descendants of Jews expelled from Portugal.
A short time before David was born, his father migrated from the Netherlands to England where
negociou na Bolsa de Valores e foi bem sucedido. David viveu durante alguns anos na
Holland with other family members, where he completed part of his education.
primary. David Ricardo entered the English stock market, showed great aptitude,
later becoming a successful broker. At 21, he converted to
unitarian protestantism and married a young Quaker, resulting in
family misunderstandings. He continued his activities in the stock market and within a few years
became rich enough to dedicate himself to studies, especially math, chemistry and
geology and acquired a rural property. In 1799, after reading The Wealth of Nations
Adam Smith became interested in economic issues.

Between 1809 and 1815, he published some pamphlets on the issue of the price of gold.
protectionism in agriculture and its effects on agricultural prices, profits of
capital and economic growth. From then on, he devoted himself to writing a treaty
general theory about the economy, the Principles, having been published in 1817,
thus constituting a decisive theoretical milestone for the development of the economy
classic policy.

In 1815, David Ricardo was already considered the most important economist of all time.
Great Britain, thanks to its practical knowledge of how the system works
capitalist. He was very influential in the contentious discussion regarding the issue of the corn laws,
that is, the importation of foreign wheat by England. David Ricardo, as eternal
a defender of free international trade, was in favor of importation. There were several

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divergences with more conservative economists, such as Malthus, who feared to see
the livelihood of British workers under the power of foreign countries, potentials
enemies. In the same year, David Ricardo published his entire liberal thesis in "Essay
about the Influence of the Low Price of Grain on Capital Profit.

In 1817 he published his great work 'Principles of Political Economy and Taxation'.
This book established Ricardo as the great name of Classical Political Economy, alongside
with Adam Smith, dominating the economy not only of England but of the whole
the Western world for many decades, until the emergence of Marxism and
marginalism (which were heavily influenced by the work of David Ricardo).

Ricardo also got involved in political issues, having been a representative of the district.
Irish from Portalington in the House of Commons of the Parliament of the United Kingdom. There
defended a set of liberal positions both in political matters (the secret vote, the
universal suffrage) as in economic issues (the freedom of trade). Died
prematurely on September 11, 1823, having left unfinished a work in which
worked.

Your works have reached vast areas of the economy, such as: monetary policy, theory
of profits, theory of land rent and distribution, theory of value and trade
international, with many of these topics remaining relevant today.

2. THEORIES OF DAVID RICARDO

As a consequence of the technical advancement observed at the time, after the First Revolution
Industry in which the introduction of machines caused changes in processes
productive and radical changes at the level of social relationships due to the
the transformation of the artisan into a proletarian saw a radical change in the relationship
between the urban environment and the rural environment in English.

This economic cycle caused, from time to time, crises in trade,

reducing the profits of entrepreneurs which consequently led to unemployment,
worsening the situation of urban masses more and more. Logically, this entire situation
it led to great agitation among the workers. They were facing a
situation of misery, which caused the mortality rate to increase at that time.

According to Ricardo, the combined application of labor, machinery, and capital in the process
productive generates a product, this is divided among the three classes of society: properties
from land (in the form of land rent), wage workers (in the form of
salaries) and the capitalist landlords (in the form of capital profits). The role of the
economic science would be to determine the natural laws that guide that distribution.

For David Ricardo, equilibrium could be achieved through the application of his theories.

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2.1 Theory of Value - Labor
While for Adam Smith the value of goods was determined by
the amount of work that these goods could buy, designated by
theory of commanded labor value, for David Ricardo the exchange value of the
merchandise was determined by the amount of labor necessary for its production,
it did not depend on abundance, but rather on the greater or lesser degree of difficulty in its
production becoming known as the theory of the value of incorporated labor.
the prices of goods are, then, proportional to the labor incorporated into them. For
David Ricardo's theory of prices is nothing more than a theory of relative prices, or
simply due to exchange reasons between different goods.

David Ricardo considered scarcity and quantity as sources of exchange value.

work. Scarcity explains the exchange value of non-reproducible goods,
while the amount of labor explains the exchange value of goods
reproducible. For Ricardo, economics should be concerned with commodities
reproducible, as they are the overwhelming majority of the goods that are exchanged in
economy, due to this thinking scarcity ceases to be important for the
economy.

2.2 Distribution Theory / Income Theory

How the payment to be made to the landowner for the availability of the
land use? This is the main question to be asked regarding 'differential' rent.
(the one that results from the different fertility of the lands and the competition among entrepreneurs)
for your exploration). The previously posed question is related to
Another one is the following: What is the role of land income in the economy? The answer to this
The last question allows for a better understanding of the economic mechanisms of the
capitalist society.

When analyzing these two issues, David Ricardo presented a distribution model of
yields with important implications for economic growth and policy
economic.

Three hypotheses were considered by David Ricardo for the elaboration of his
income distribution model:
• The law of diminishing returns reflects that in order to achieve quantities
equal additions of a good, the society has to use increasing quantities
of factors. If there are diminishing returns in the production of a good, the
the opportunity cost of producing successive units of the same good is each
greater

Let's suppose an experiment that consists of adding excessive units of

I work on a fixed amount of land.

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Table 1 – Wheat Production

PRODUCTION
EMPLOYMENT IN VARIATION
PRODUCTION OF WHEAT NA
OF WHEAT PRODUCTION
0 0
1 4 4
2 7 3
3 9 2
4 10 1

From this, we conclude that, when adding work units to a fixed quantity of
Factoring in the Earth, the increases obtained in wheat production are becoming increasingly smaller.

• The Malthusian law of population. The population grows or decreases according to

the availability of food. Thus, wages tend to remain
At the subsistence level, whenever they move away from this level, the law is observed.
of demographic growth, increasing or decreasing the supply of
workers.
• The driver of product growth and, consequently, of investments, is found in the
profit, more precisely the profit per unit of capital invested.

For David Ricardo, the sequence and correlation of these three hypotheses caused the
appearance of the stationary state, where production in the economy stops growing.
In other words, demographic pressure leads to the use of more land, with the most fertile being the,
initially, more cultivated by entrepreneurs, which leads to them becoming each
less fertile, as a consequence of this fact, the profit rate becomes increasingly
younger and the income increasingly higher. Thus, cultivating new lands (less fertile),
it is necessary to increase the amount of work to produce the same goods,
thus increasing its value and consequently the natural salary as well. The
owners of the best lands sell their products at a price higher than their cost
of production, constituting the difference, the differential income.

In light of such a situation, David Ricardo fights this entire pessimism with his idea of
freedom of trade. Importation would lead to entrepreneurs not being
thank you for using less productive land, and thus an increase in income and
reduction of the profit rate. In this way, the profit rate would not decrease and the state
stationary could have been avoided. Note that this freedom of trade would not be suitable
to the landowners who would see their incomes decrease.

2.3 Theory of International Trade

This theory by David Ricardo informs us of the advantages of trade between nations.
In his time, this economist took an active part in a controversy about whether the
England should practice free trade, freedom of international exchanges with

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elimination of protective customs rights, or protectionism, with the suppression of
taxes on imports and the removal of administrative barriers to freedom of
trade between nations. David Ricardo, as previously mentioned, was a
defender of entrepreneurs and an important advocate of free trade.

2.3.1 Principle of comparative advantage and its analysis according to David Ricardo

Ricardo was the first economist to argue that international trade could
benefit two countries, even if one of them produced all the products more
efficient, a country does not need to have an absolute advantage in the production of a
determined product. For two countries could benefit from mutual trade if each
had a comparative advantage in the production of any product.

David Ricardo explains his theory using an example involving Portugal and
England has only two goods, wine and clothing, it decided to measure all relative costs of
production, expressed in hours of work.

Table 2 - Comparative Advantages

(Working hours/unit produced)
TEXTILES WINE
England 63 70
Portugal 120 80

Analyzing table 1, it is concluded that England is more efficient than Portugal in

both productions. England has an absolute advantage in production of
wine, want it in fabric. Even so, Mr. Ricardo proved that the trade
international remains profitable.

The units of work necessary for the production of any of the products, in Portugal,
in percentage terms, the work requirements for England are:

Wine Fabric

80h 120h
= 1.14 = 1.90
70h 63h

Despite Portugal's absolute disadvantage in both goods, the country has a

comparative advantage in wine production and a comparative disadvantage in
fabric production.
In the case of England,

Wine Fabric

70h 63h
= 0.875 = 0.525
80h 120h

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has a comparative advantage in fabric production and a comparative disadvantage
in wine production (0.525<0.875).

From this study, Ricardo proved that each country would benefit if it
they specialize in the product in which they have the greatest comparative advantage, the total product
the global value of each good increases, improving the situation of all the countries involved in the
international exchanges, as the production costs would be lower, the salaries of
the subsistence of workers and consequently the profits would be the highest possible.

2.3.2 Critique of the principle of comparative advantages (Ricardian Model) and

protectionism

The classical Ricardian model seeks to explain the patterns of international trade.
based on the differences in productivity between countries. The problem is that the principle
Comparative advantages only assume the existence of differences, but it never attempts
understand or identify the reasons that may explain the existing differences. And the
world prices or exchange terms in this model are indeterminate.

Another criticism of the Ricardian model is that it assumes a single factor of production.
work, it is not possible to analyze the distributive effects of income. All the
countries gain when there is a freedom of trade, however there may be some
individuals, companies, and factors of production that are harmed and would have
higher yields if there were restrictions on trade. Those who lose try
defending oneself from the 'international enemy' and the 'protectionism' emerges. The 'protectionism'
it is a trade policy that tries to protect national industries from imports
reduced prices with some measures being taken such as imposing taxes
customs duties and import quotas. Protectionism opposes free trade and
therefore to Globalization from the commercial perspective.

The competitiveness of products is not only determined by comparative advantage but

also by the appreciation or depreciation of capital.

Despite its limitations, the theory of comparative advantage is one of the most truths.
deeply affects the entire economy. A country that does not respect comparative advantage pays
a high price in terms of living standards and economic growth.

3. INTERNATIONAL TRADE
International trade is the exchange of goods and services across borders.
international or territories. In most countries, it represents a large share
of GDP. International trade has been present throughout much of history of the
humanity, having had an increasing importance over time. The advancement
industry, transportation, globalization, the emergence of multinational corporations,
and outsourcing had a great impact on the increase of this trade, this
increase is usually associated with the phenomenon of globalization.

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3.1 REGULATION OF INTERNATIONAL TRADE
Traditionally, trade is regulated through bilateral treaties between the
nations. During the centuries of belief in mercantilism, most nations maintained
high tariffs and many restrictions on international trade. In the 19th century,
especially in the United Kingdom, the belief in free trade has become a paradigm and,
Since then, this thought has dominated the Western nations. Subsequently to
World War II multilateral treaties like GATT and WTO attempted to create
worldwide refutational structures.

Although socialist and communist nations claim to be self-sufficient, in

In practice, no nation can face the needs of its people alone.
becoming always necessary to engage in some trade.

Normally, the economically most powerful countries advocate for trade.

free international. Currently, the United States of America, the United Kingdom and the
Japan is the biggest proponent of this thinking. However, the rapidly
economic growth like India, China, and Russia have become advocates of
free trade.

Traditionally, agricultural interests are in favor of free trade, while

manufacturing sectors defend protectionist policies. However, agricultural lobbies,
particularly in the U.S., Europe, and Japan, are responsible for the introduction of rules
nos tratados de comércio internacional, cujo objectivo é a adopção de medidas
protectionists for agricultural origin goods. However, Brazil, being a large and
efficient agricultural producer has been trying to eliminate some of these barriers.

It should be noted that the increase in import tariffs occurs when there is a
economic recessions, with the intention of protecting domestic production.

The regulation of international trade is carried out through the WTO at the level
global, and through various regional sectors such as Mercosur in South America;
NAFTA, between the United States of America, Canada, and Mexico; and the European Union,
among 25 independent European states.

3.2 RISKS OF INTERNATIONAL TRADE

The risks of international trade can be divided into two main groups:

• Economic Risks
The risk of insolvency of the buyer;
The risk of delay in payment;
The risk of non-acceptance;
The risks related to economic sovereignty.

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 • Political Risks
the risk of cancellation or non-renewal of export licenses or
import
Risks related to armed conflicts;
The risk of expropriation or seizure by importing companies;
The risk of imposing a ban on some goods after shipment;
The risk of transfer
The risks related to political sovereignty.

4. KEY CONCEPTS
Relative costs Steady state
Importation Freedom of trade
Profit Rate Protectionism
Income Differential income
Diminishing returns Natural salary
Absolute advantage Comparative advantage

5. BIBLIOGRAPHY
[1] Samuelson, P. e Nordhaus, W., “Economia”, McGraw-Hill, 1999, pp. 688-695

[2] Neves, João César, “O Que é a Economia?“, Principia, Cascais, 2003, pp. 103-
118.

Morcillo, Robert Luís Froster, "The Great Currents of Economic Thought"

1994, pp. II9-II13.

6. CONSULTED SITES
[1] [Link]

[2][Link]

[3][Link]

[4][Link]

[5] [Link]
PT&u=[Link]
ricardo&start=80&hl=pt-PT&sa=N

[6] [Link]

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