84 COMPARATIVE ADVANTAGE
David Ricardo Considered one of the world’s
greatest economic theorists, David
Ricardo was born in 1772. His
parents moved to England from
Holland, and at the age of 14
Ricardo began working for his
father, a stockbroker. Aged 21,
Ricardo eloped with a Quaker,
Priscilla Wilkinson. Religious
differences between the families
resulted in both sides abandoning
the couple, so Ricardo started his
own stockbroking firm. He made a
fortune betting on a French defeat
at Waterloo (1815) by buying
English government bonds.
Ricardo mixed with notableeconomists of his day, including
Thomas Malthus (p.69) and John
Stuart Mill (p.95). He retired
from the stock exchange in 1819,
and became a member of
Parliament. He died suddenly of
an ear infection in 1823, leaving
an estate worth more than $120
million in real terms today.Key works1810 The High Price of Bullion
1814 Essay on the Influence of
a Low Price of Corn
1817 On the Principles of
Political Economy and Taxationhave to forfeit a lot of valuable shoe
production. Although in absolute
terms the inferior worker is worse
at making shoes and hats than the
superior worker, his relative cost
when making hats is lower than for
the superior worker. This is because
he forfeits less shoe production per
hat than the superior worker would.
The inferior worker is therefore said
to have a “comparative advantage”
in hats, while the superior worker has
a comparative advantage in shoes.
When countries specialize in goods
for which they have a comparative
advantage, more goods are produced
in total, and trade delivers more and
cheaper goods to both nations.
Comparative advantage resolves
a paradox highlighted by Adam
Smith—that countries that are
inferior at producing goods (they
are said to have an “absolute
disadvantage” in them) can
nonetheless export them profitably.20th-century advantage
What determines comparative
advantage? Swedish economists Eli
Heckscher and Bertil Ohlin arguedthat it comes from countries’ relative
abundance of capital and labor.
Capital-rich countries will have a
comparative advantage in capital-
intensive products such as machines.
Labor-rich countries will have a
comparative advantage in labor-
intensive products such as farming
goods. The result is that countries
tend to export goods that use their
abundant factor of production;
capital-abundant nations such as
the US are most likely, therefore,
to export manufactured goods.
Heckscher and Ohlin’s analysis led
to another prediction. Not only
would trade tend to reduce the
differences in prices of goods in
different countries, it would also
reduce wage differences: the
specialization in labor-intensive
sectors by labor-abundant
economies would tend to push up
wage rates, while an effect in the
other direction would be seen in
the capital-abundant country. So
despite the overall increase in theThe increased importation of tires
from China (left) led the US to impose
trade restrictions in 2009. This, in turn,
led to a full-blown trade battle and a
deterioration in diplomatic relations.