Economy Essay Example | Topics and Well Written Essays - 1000 words - 2

Economy - Essay Example Principles of Political Economy and Taxation was published in 1817. In this publication, Ricardo developed law of rent as well as the labor theory of money (Gonner, 2013). The theory of comparative advantage, as developed by Ricardo, tries to explain the benefit of engaging in international trade. The theory was initially discussed by Adam Smith in the Wealth of Nations. The theory was, however, clearly developed by Ricardo in the book On the principles of Political Economy and Taxation. In the development of the comparative advantage theory, Ricardo observed that if two countries with a capability of producing two products participate in free trade, each of the two countries will increase productivity by exporting the commodity that it has a comparative advantage in production. The country would then import the other commodity. In this theory, Ricardo implies that comparative advantage, and not absolute advantage, is responsible for international trade (Gonner, 2013). The example used by Ricardo to explain comparative advantage involved England and Portugal. In this example, the two countries produce cloth and wine. However, Portugal is more efficient in the production of the two commodities compared to England. England needs 100 hours to produce a unit of cloth and 120 hours to produce a unit of wine. Portugal on the other hand requires 90 hours to produce unit of cloth and 80 hours to produce a unit of wine. In this case, England requires 100 hours to produce cloth, which can instead produce an incomplete unit of wine. Portugal can produce a unit of cloth with few hours compared to England. However, Portugal must forego the production of more units of wine in order to produce a single unit of cloth. Although Portugal has an absolute advantage in the production of cloth, England has a comparative advantage in the production of cloth. In this example, England has a comparative advantage in the