David Ricardo – First Principle

On measuring comparative advantages of foreign trade

The paper below demonstrates that the development of comparative advantages of foreign trade can be determined in the same way as technical change in production processes of individual countries. After describing David Ricardo’s principle, the paper discusses his example of trade in cloth and wine between England and Portugal. This example, using simple production processes with only direct labour, demonstrates how mutual trade can increase the total production of both countries. Comparative advantages become visible by simply adding the production of both countries as if they were a single country. More complex situations arise if, in addition to mutual trade, technical change in production processes occurs that vary from country to country.

The elaboration of Ricardo’s example further suggests the hypothesis that a country’s comparative advantages may become greater if it produces more efficiently than its trading partners.

This hypothesis is central to the analysis, which also considers indirect labour. Often, the export of efficiently produced commodities that make less efficient production elsewhere redundant will be reflected in a comparative advantage, demonstrating that less labour is required for the total production of that commodity. However, the reduction in less efficient production could lead to unemployment. The paper therefore emphasises the importance of a rapid implementation of the input-output tables required for the measurement, which will not only allow a factual description of technical development in individual countries, but also provide a clear insight into the actual development of comparative advantages associated with mutual trade between countries and how this contributes to employment and efficient production in each country individually.