Research by David Ricardo in the field of international trade created the prerequisites for its further development. The economist proved that it makes sense even if the country has no advantages in producing at least some kind of product. He showed that here it is not so much the product itself that matters that matters, but the cost ratio of its production. If these differences exist, it means that the country has comparative advantages over others and can safely engage in the production of this type of product. It is in its manufacture and export that she should specialize.
David Ricardo's theory of comparative advantage is based on a number of assumptions. It proceeds from the fact that:
- two countries have two goods;
- all production costs are only wages, which is also the same for all professions and qualifications;
- there is the possibility of free trade between countries;
- no transportation costs;
- Wage levels that are not the same in different countries are ignored.
How does the theory of comparative advantage, Ricardo showed on the example of trade in two European countries with cloth and wine. In terms of economic performance, Portugal at that time was superior to Britain in the production of both. If we proceed only from this, then we can decide that it did not make sense for her to trade with England. However, David Ricardo, developing the ideas of Adam Smith, went further. He developed a theory of comparative advantage. Its essence lies in the fact that it is profitable for a country to trade in the international market the products that it produces at minimal cost compared to the production of other goods.
So, both countries make cloth, but Portugal is more profitable, given the size of the costs, to produce wine and exchange it for English fabric. Britain will not be offended either. She will receive wine at a better price, at lower cost, than if she herself were engaged in its manufacture and sale.
However, keep in mind that this model is too simplistic. In practice, an increase in production is inevitably associated with an increase in marginal cost. It also happens that the further release of one unit of goods forces us to refuse to increase the production of others.
And all the same, if the theory of comparative advantages underlies specialization, it will nevertheless ensure the growth of a certain type of product and help to use world resources more efficiently. It will also help to save labor in the country - despite the fact that the volume of goods produced in it remains the same or even increases. Followers of David Ricardo pointed out the fact that even with a difference in pay, the theory of comparative advantage will not undergo significant changes.
Thus, she advises to import into the country the goods that are produced at higher costs than those that are exported. Modern economists have proven that this theory really works. Moreover, it is effective for any number of participating countries and goods, and not just for two.
The theory of comparative advantage has another undoubted advantage: it proves that trade between different states is beneficial to both parties. Of course, someone will receive less profit, and someone more, but everyone will be satisfied as a result. This is the main achievement of the theory of David Ricardo. She confirmed the idea of Adam Smith about the benefits of the division of labor for absolutely all of its participants, without exception.
True, this theory has one drawback: it does not explain why these same comparative advantages nevertheless add up.