David Ricardo

David Ricardo was a British economist born in the year 1772 in London. He is one of the rarest people who achieved considerable success and lasting fame. Ricardo made a fortune as a stock broker and a loan broker after his family disinherited him when he married outside the Jewish faith. His fascination with economics grew at the age of 27 after reading Adam Smith’s Wealth of Nations (Library of Economics and Liberty, n.d.). His first economic article came at the age of 37, and he spent next 14 years as a professional economist. In addition, he established his personal business where he worked until his retirement in 1814. In 1819 Ricardo was voted into British parliament representing an Ireland borough until his sudden death in 1823. Majority of his contributions in parliament focused on the currency and commercial interests that were common during his time. Some of his notable works included â€The Influence of a Low Price of Corn on the Profits of Stockâ€, “The Principles of Political Economy and Taxationâ€, and “High Price of Bullion, a Proof of the Depreciation of Bank Notes†(Library of Economics and Liberty, n.d.). However, the most notable one today is “The Principles of Political Economy and Taxationâ€, which was published in 1817.

Other economists noticed him with the 1809 “Bullion Controversy†arising out of the pamphlet “The High Price of Bullion, a Proof of the Depreciation of Bank Notes†(Library of Economics and Liberty, n.d.). This year he wrote about causes of inflation in England. He explained that the major cause of inflation in England was the issuance of excess bank notes by the Bank of England. This marks the origin of the quantity theory of money that the modern economists term as monetarism (Library of Economics and Liberty, n.d.). Thus, his recommendation was to the Bank of England to withdraw the use of gold in the economy. Some of Ricardo’s papers included theory of value, theory of rent, and Ricardo’s theory of comparative advantage considered as the origin of opportunity costs.

Ricardo highlights his views on free trade in his theory of comparative advantage. He presented the first views of international trade in the Principles of Political Economy and Taxation of 1817. After analysis of Adam Smith’s theory of absolute advantage, he viewed it as too optimistic if not simplistic. Thus, to explain this, Ricardo asked what would happen if country A possesses absolute advantage in all lines of production over country B. He also asked if county B would benefit from trade. Ricardo’s answer was yes as long as country B was not equally less productive in all lines of production (Ricardo, 1951). He used the examples of England and Portugal in order to explain his claim about international trade.

The hypothesis of comparative advantage used labor as the raw material essential for the production of wine and cloth. According to him, there is an absolute advantage in Portugal in the production of wine and cloth over England. Under comparative aspects, Portugal has a comparative advantage as it uses 80/120 of England’s effort to produce wine and 90/100 of England’s effort to produce cloth. On the other hand, England takes 120/80 of Portugal’s effort to produce wine and 100/90 of Portugal’s effort to produce cloth. Thus, England has a comparative advantage by producing cloth (Ricardo, 1951). This meant that it could benefit from trade. Thus, to make his conclusion, Ricardo saw it beneficial for a country to specialize in the production of commodities in which it had a comparative advantage (Ricardo, 1951). Thus, this marked the origin and the basis of today’s view on the free trade. The idea that emanates from this analysis is that countries which trade for products can buy such products at a lower price from other countries, and will be better off than if they made these products at home. Thus, the view that Ricardo had on the trade and comparative advantage has influenced international trade, more especially free trade. Countries today focus on their specialization in the production of certain commodities. The contribution to free trade among countries and specialization of countries has enabled countries to benefit from free trade.

Ricardo’s concept of comparative advantage involves parts of opportunity cost. The opportunity cost shows possible benefits that a country can get when it applies a given asset or factor of production in making of one product, as opposed to using this asset or factor of production in the process of creating another product. Thus, it is vital to note that theory of comparative advantage by Ricardo provided the basis in explanation of opportunity costs, but using only differential in labor among countries.

The above table presents the analysis of opportunity costs between Portugal and England using the examples of Ricardo. Thus, Portugal has a lower opportunity cost in the production of wine and England has an opportunity cost that is low in cloth production. Thus, using this concept, from the perspective of opportunity cost, countries’ comparative advantages emanate if the production of a commodity in the opportunity cost in producing an extra unit of that commodity is lower in the country than the cost of producing another commodity that is competing for the same factor of production in the same country. However, today’s modern economic concepts cut across all factors of production in order to explain opportunity costs. Thus, modern concepts of opportunity cost focus on the cost minimization.