Question

1.

A. State the Ricardian comparative advantage theory.

B. Critically discuss the Ricardian theory.

Answer 1

A. State the Ricardian Comparative Advantage theory.

The Ricardian Comparative advantage theory was one of the best, which helped countries in choosing what to produce. At any given point of time, a countries resources, allow it to produce a combination of different goods which it needs to cater to the needs and wants of the general public.

The Ricardian Model was suggested by David Ricardo who is one of the key pioneers of international trade related theories respectively. He gave a model wherein he suggested, that a country is more likely to produce goods which it has a comparative advantage on. This advantage can be explained as the favorability that a country has in production of a particular kind of commodity because of the natural conditions, manpower availability, skills of the workers and other social economic factors.

Ricardo stated. That if a country finds it easier to manufacture a particular commodity, it then is most likely that the country will engage in production of the said good and divert its resources to maximum production. Once, the local demand is fulfilled the country then would start exporting the produce to other countries and in exchange import goods that it does not have an advantage on.

He stated this to be the best mode of production and trade in international markets. And broadly stated that a country must maximize its production in those areas where it holds an advantage respectively.

B. Critically discuss the Ricardian Theory.

The Ricardian theory in the modern times is extremely important to realize how trade happens across various countries. Most countries tend to export a maximum of those goods and services which it has an advantage in.

For example the United States has an advantage of technology and therefore it produces related items and can import goods in shortfall such as crops very easily. On the other hand, the country of India is relatively strong in terms of crop goods and lacks technological knowhow and therefore can export crops to the United States in return for Technological products purchased as per international currency standards.

The criticality here to be observed is that, countries that are technologically backward in nature, cannot go on producing primary goods and exchanging them for primary ones. The transition of a country is equally important. This is evident in the fact that developing countries exchange primary goods for capital ones and transform their infrastructure and economics in such a way that their comparative advantage changes over a period of time.

For example prior to 1990's the Software Industry was restricted to the United States only. But government involvement meant a change in stance and import of technology largely helped countries such as China and India become the hub of manufacturing and software industries.

Therefore, while Ricardo’s comparative advantage theory tells us on what to produce, the transition from producing low valued goods to high valued ones is equally important to reduce the fiscal deficit for a country respectively.

Please feel free to ask your doubts in the comments section.