Explain the basis for trade according to David Ricardo? How are the gains from trade generated? Do you think that David Ricardo’s law of comparative advantage is superior to Adam Smith’s theory of absolute advantage? Why or why not?
David Ricardo was one of the most influential of the classical economists. Perhaps his most important contribution was the law of comparative advantage, a fundamental argument in favor of free trade among countries and of specialization among individuals. The purpose of this essay is to explain the basis for trade according to David Ricardo. Also, this essay will discuss how the gains from trade generated are. And I believe that David Ricardo’s law of comparative advantage is superior to Adam Smith’s theory of absolute advantage, and this essay will explain the reason. Comparative advantage is the basis for trade. It is possible for one country to have absolute advantages in many goods but still trade in these goods. Ricardo’s law of comparative advantage is superior to Smith’s theory of absolute advantage because Smith’s theory of absolute advantage theory did not apply free trade to implement economic growth and increase benefits for people life quality. Smith’s theory of absolute advantage ignores role of free trade and focus on absolute advantage of a nation. However, David Ricardo’s comparative advantage makes full use of law of free trade to realize role of free trade. Based on the theory of comparative advantage, two nations need to use free trade to realize comparative advantage (Chang, 2002). A nation needs to use principle of free trade to win absolute advantage. David Ricardo worked in the early part of the 19th century. He realized that absolute advantage was very limited case of a more general theory. Comparative advantage may help country use free trade to win maximum productivity and maximum profit. For example, Portugal can produce both wine and wheat more cheaply than England. Portugal has an absolute advantage...
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