The Economics Book

82

T

he ideas of the renowned
18th-century British
economist David Ricardo
were clearly shaped by the world he
inhabited and by his personal life.
He lived in London, England, at a
time when mercantilism (pp.34–35)
was the dominant economic view.
This held that international trade
should be heavily restricted. As a
result governments introduced
policies that aimed to increase
exports and decrease imports in
an attempt to enrich the nation
through an inflow of gold. In
England the policy dated back to

Elizabethan times. Ricardo thought

that in the long run such protectionist

policies were more likely to restrict

the ability of the country to increase

its wealth.

Early trade protection

Ricardo was particularly concerned

by the introduction of a British tax

known as the Corn Laws. During

the Napoleonic Wars (1803–15) it

was not possible to import wheat

from Europe so the price of wheat

in Britain had risen. As a result

many landowners increased the

proportion of their lands dedicated

COMPARATIVE ADVANTAGE

to growing crops. However, as the

war temporarily came to an end in

1802, the price threatened to fall

back so the landowners—who also

controlled Parliament—passed

Corn Laws to restrict the importation

of foreign wheat and place a “floor,”

a bottom price, on grain. When the

wars ended in 1813, the Corn Laws

were used to raise the floor price

again. The laws protected farmers

but also pushed the price of bread

beyond what poorer people could

pay at a time when newly returned

soldiers and sailors were unable

to find work.

IN CONTEXT

FOCUS

Global economy

KEY THINKER

David Ricardo (1772–1823)

BEFORE

433 BCE The Athenians impose

trade sanctions on the

Megarians in one of the first

recorded trade wars.

1549 John Hales, an English

politician, expresses the

widely held view that free

trade is bad for the country.

AFTER

1965 US economist Mancur

Olson shows that governments

respond more to the appeal of

a concentrated group than one

that is more dispersed.

1967 Swedish economists

Bertil Ohlin and Eli Heckscher

develop Ricardo’s trade theory

to examine how a comparative

advantage might change

over time.

Making a product entails

costs. One of these costs

is time.

Trade is

beneficial for all.

Even if Country A

can do everything better

than Country B, it will profit

most by focusing on the

things it does best. It is

too costly to sacrifice time

on something it does

less well.

Both countries benefit

from a comparative

advantage, which makes the

most efficient use of their

time and resources.

This allows Country B,

which is good (but not

the world’s best) at making

the products Country A

does not make, a chance

to make them without

undue competition.

Overall, more goods are

produced, giving consumers

a wider range of products

at lower prices.