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David Ricardo: Theories
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David Ricardo was one of the most important figures in the development of economic theory. He is widely credited with systemizing the Classical school of economic thought. Without doubt his thinking dominated 19th Century government policy and his theories still maintain significant influence today.
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David Ricardo’s wealth is a perfect example of the success of Free Trade. By developing a knack for finances and the stock market, and using it to his advantage, he could have retired by the age of thirty. His theory... brilliant, was never used because the people couldn’t understand it, and didn’t like it that much anyway. Basically, Ricardo thought that each country should play to its strengths, and work with other countries for the general good. For example, let’s look at the Gilligan’s Island analogy. Let’s say Gilligan and the skipper are by themselves on an island.
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Ironically, Ricardo’s proof was based on a flawed labor theory of value--the same theory Karl Marx would exploit to “prove” the supposed superiority of central planning over capitalism. Modern economists... have demonstrated that the universal gains from trade also hold in the case of more broadly based theories of value that incorporate the contributions of other factors of production such as capital, technology, and managerial know-how. Importantly, these modern proofs do not require the existence of barriers to the free flow of labor or capital. All that is required is that there be differences between two regions in the costs of production.
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Comparative advantage, Ricardo believed, ensured that international trade would bring benefits for all countries; his theory remains the foundation of the economic case for free trade today. He argued that each country should specialize in making the products in which it possessed a comparative advantage, that is could produce relatively efficiently. Portuguese sunshine, for example, gave Portuguese entrepreneurs a comparative advantage in producing wine, whereas England's wet climate meant that her comparative advantage was in making cloth. Ricardo showed that, by specializing in production and then trading, Portugal and England would each achieve greater consumption of both wine and cloth than in the absence of international trade.
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Ricardo is named after the economist, David Ricardo, who developed the theory of comparative advantage. This theory says, in brief, that trade is mutually advantageous even when one party has an absolute advantage.
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Ricardo is best known for his eminence as an economic thinker who was ... closely involved in the city’s financial history. His work initiated the now dominant tradition of economic analysis rooted in systematic theoretical modelling. To this day, his insights into the principles of trade and public finance remain pertinent.
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