Ricardo Flashcards
what is an absolute advantage
a country has an absolute advantage over another if it can provide the product or commodity more efficiently than another. assume two nations A and B and two goods X and Y and have an advantage in the production of one of the goods. A specialises in good x and b In Y. then both nations gain by specialising in their absolute advantage
what were the two essential concepts in economics created by Ricardo?
comarative advantage and opportunity cost
what is a comparative advantage?
a country benefits from trade because its factor endowments or technological ability make it better suited to produce one particular good. it produces the good at a lower opportunity cost then the other country
what is the opportunity cost?
when there are a range of options are given and a choice is made, the opportunity cost is the cost of having forgone the next best alternative to the choice
how does trade relate to a comparative advantage?
trade as an activity can be mutually beneficial to countries A and B even if one country has an absolute advantage in the production of both goods X and Y so long as each country has a comparative advantage in the production of one good
what was ricardos theory of rent?
he started by assuming that the rational humans would occupy and till the most fetie land first. he also felt that if there was plenty of this land then there would be no rent. the growth of population will force the use of less fertile land. as this happens rent will begin on the most fertile land and the value will be determined by the differential in fertility. he assumes that the rent on the least fertile land always remains at zero as he assumes the capitalist farmer gets the rate of profit on the capital investment and the workers get their prevailing wage and nothing remains for rent
what was ricardos theory on wages?
he made a distinciton between the market price of labour and the natural price of labour. some people have theorised that he had a straight forward fixed wage theory as the natural wage meaning. “the natural price of labour is that price which is necessary to enable the labourers, one with another , to subsist and to perpetuate their race without either increase or diminution.
what is ricardos two types of valuation?
he statesd that there is values in use and in value of exchange and that a high value in one does not necessarily mean high value in another. his example was water and air is abundantly useful however when you try to trade it you will not get much for it. whereas gold on the other hand has a high value of exchange but a low value in use
what are the two factors that determine the exchangeable value according to ricardo?
they derive their exchangeable value from two sources: their scarcity and from the quantity of labour required to obtain them. some form of labour theory of value - there is an association between value and the labour realised( not just the labour used to make the commodity itself but also the labour used to make the capital goods)
what are Ricardos two propositons of value with labour?
there will be no rise in the value of labour without a fall in the value of profits - rise in labours share will lead to a reduction of profits
no alteration in the wages of labour could produce any alteration in the relative values of the commodity. - argue that relative value of commodities is independent of any change in wages
what is the equation for ricardos theory of value?
p = lw +pk + pkr where p is the price, l and k are labour and capital coefficients and r is the rate of profit. you can divide the price by the wage rate to get the labour commanded.
what occurs to the equation for ricardos theory of value when there is a fall in productivity?
when there is a fall in labour productivity, ricardo says there is a fall in the profit. this shown by the equation. assume that the price and wage is given. then a fall in productivity means more labour must be applied in order to produce the same amount. so if l increases, and all other constants are wage and price is fixed then the profit must fall .
what was ricardos theory on time?
it should be clear that an increase in time to make a commodity will require more profit(just like it is with interest) , and thus its relative price must rise and changes in the rate of profit will also affect relative prices
blaug comments that we should really be talking about a theory of interest in ricardos theory rather than a theory of profit
what are the problems with ricardos theory of value?
it is okat comparing two goods such as cloth or corn but when there are multiple goods it becomes more complicated in practical terms. if goods are made with both capital and labour how does a wage increase affect the price of the good (if they are all made with no capital or the same proportion then it should be unaffected but if goods have different ratio of labour and capita the problem occurs)
if the prices of all goods vary then the value of the one chosen as the value (numereaire ) would also change therefore how can you distinguish between the variations of price from one another. (they were looking for an invariable measure of value however all prices in reality are variable)
what is the critique on ricardos on value?
they argue that ricardo on value is incredibly unclear
