Essay on the David Ricardo's Doctrine of Comparative Costs of International Trade
David Ricardo, in his Principles of Political Economy (1817), furnished a more precise formulation of the theory of international trade. At the centre of the Ricardian theory of international trade is the celebrated principle of comparative advantage of "doctrine of comparative costs."
In fact, the doctrine of comparative costs was developed by Ricardo out of his (classical) labour theory of value. According to this theory, the value of any commodity is determined by its labour costs.
It asserts that, goods are exchanged against one another according to the relative amounts of labour embodied in them. For the prices of goods within a country are proportional to the relative quantities of labour contained by them. Thus, the exchange ratios or prices are determined solely by relative labour costs, through their influence upon supply and demand.
If the goods of a particular industry have their prices higher than their labour costs, additional labour moves to this industry from other occupations. Hence, the supply of that industry's goods will expand until their prices equal their labour costs. The labour cost principle, therefore, implies that there is a tendency of wages toward equality within a country, so that, prices of goods will be equal to their labour which may equalise the return to labour in all productions and regions throughout the country.
The labour cost principle is, however, based on the following assumptions that:
1. Labour is the only productive factor,
2. All labour is of the same quality and characteristics,
3. Labour has perfect mobility,
4. There is perfect competition in the labour market.
Ricardo, thus, thought that the labour theory of value, which is completely valid for the domestic trade of a country, cannot be applied to international trade, since factors of production are immobile internationally.
Like other classical economists, he also believed that, labour is completely mobile within a country and
In fact, the doctrine of comparative costs was developed by Ricardo out of his (classical) labour theory of value. According to this theory, the value of any commodity is determined by its labour costs.
It asserts that, goods are exchanged against one another according to the relative amounts of labour embodied in them. For the prices of goods within a country are proportional to the relative quantities of labour contained by them. Thus, the exchange ratios or prices are determined solely by relative labour costs, through their influence upon supply and demand.
If the goods of a particular industry have their prices higher than their labour costs, additional labour moves to this industry from other occupations. Hence, the supply of that industry's goods will expand until their prices equal their labour costs. The labour cost principle, therefore, implies that there is a tendency of wages toward equality within a country, so that, prices of goods will be equal to their labour which may equalise the return to labour in all productions and regions throughout the country.
The labour cost principle is, however, based on the following assumptions that:
1. Labour is the only productive factor,
2. All labour is of the same quality and characteristics,
3. Labour has perfect mobility,
4. There is perfect competition in the labour market.
Ricardo, thus, thought that the labour theory of value, which is completely valid for the domestic trade of a country, cannot be applied to international trade, since factors of production are immobile internationally.
Like other classical economists, he also believed that, labour is completely mobile within a country and