Timeless economics

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Posts Tagged ‘david ricardo

COMPARATIVE ADVANTAGE-what happens when you force your self to do something you are not capable of…

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1. you may discover in the process that you can actually do it, but barely; and

2.you will find out in the end that you are wasting your time and effort doing something which others can do on your behalf easier and faster. (even if, you can)

Comparative Advantage is the bottom point of asking that question. This theory was made known to men (and women) by DAVID RICARDO (http://en.wikipedia.org/wiki/David_Ricardo).

He was a member of the parliament during his days, a businessman, a speculator and financier who has amassed a considerable amount of wealth. Like most of us, he was normal, until, he has read a book by Adam Smith, entitled “The Wealth of Nations” while having a vacation with his ailing wife (Priscilla Anne Wilkinson) in Bathes.

So what is comparative advantage?  Comparative Advantage according to David Ricardo happens when a country focuses on producing goods with which they capable of at the lowest rate and with most convenience. and the most relevant story I can think of, is the story of the MONKEY AND THE EAGLE (authored by, the monkey himself). The Monkey lives in “banana republic”, which is soaked with banana trees, banana leaves, banana trunk and banana heart. :D. The eagle lives in “Land of the Free Eagles”  and they abound in metal, and other raw materials needed to produce hi tech pans, ovens, blenders and stoves which were needed by the monkey to cook his banana recipes and goods such as banana chips, banana cake, banana shake and banana balls. For a couple of years, the monkey and the eagle were good friends,EAGLE gives MONKEY the tools and MONKEY gives EAGLE bananas in return and so they were both able to eat banana recipes over the next 30 years. The bananas grew freely in Banana Republic and all that the monkey had to do is wait for them to turn yellowish and harvest. Same with Land of the Free Eagles, where metals and other materials were flowing freely like a river out of the nowhere. And then one day they had a fight. Monkey hated Eagle and eagle despised Monkey. No more kitchen tools for monkey and no more bananas for eagle. Eagle became boastful because he discovered that the banana seeds out of the bananas the monkey gave him are growing, though barely and monkey became arrogant after finishing a course in the “vocational school for fixing imported tools”… With this in mind they thought they can survive without each other. However, the bananas produced were a lot lesser than the ones in Banana Republic, while the monkey, is now struggling to repair the tools he uses to produce the banana recipes. They were both able to find ways to solve their problems but it cost them both tremendous time and effort doing such. Eagle had to work in the not so productive banana field for 5 hours a day just to produce 10 pieces of bananas where in fact all that the monkey had to do was wait for it to get ripe. The monkey also is taking hours before he can fix a broken button or missing screw in the tools while the eagle simply had to replace it by calling Martwal or Homedeported (popular stores). They grew tired and more exhausted as each month of trying to be independent from one another continued. The eagle’s resources were depleted out of purchasing tons of fertilizers to sustain the barely living bananas he had planted while the monkey, who even barely had resources in the first place is now struggling to keep the machines running, using wooden pegs as replacement of the bolts and screws holding the ovens, pans, and stoves together and needing to pat the top of the of the oven repeatedly and sometimes violently in order for it to start heating up. They eventually gave up and a peacetalk occured, they both asked for pardon and realized they cannot exist without each other.  Trying to produce goods which costs them a lot to maintain will simply make the eagle eventually poor in the long long run, and will make the monkey even poorer after a not so long time. And after that day, they traded happily ever after.

note- just in case you were thinking that bananas could have been eaten raw by the monkey providing him the chance to survive without the eagle’s tools, no he can’t. the author describes the bananas as “inedible unless cooked” otherwise it will become “absolute advantage.  hahaha!

Although it has been explained by other economists in the earlier years, much of what is comparative advantage is about was credited to  David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal. In Portugal it is possible to produce both wine and cloth with less labor than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good that it has comparative advantage in and trading that good for the other. click me for the full text

The significance of comparative advantage is that it has enabled countries to survive and avoid collapse by knowing where to focus and  what to avoid doing. However, this does not necessarily mean we are invulnerable to trade imbalances and deficits. When a country has more demand of the goods it has an advantage of while the other has little demand from the outside of what it is capable of producing, it sparks a problem which also would result an economic crisis. As time has passed, the demand  for certain goods and for what goods are needed by most countries, so has the advantage also. And it resulted to having countries which thinks they and their products are already useless especially if what they produces is not a commodity that other countries would die for just to avail. We have seen how the attention has shifted from the west to the middle east as the world has become addicted to oil. Therefore, Comparative advantage is not just simply focusing on what a nation can produce and settle for it but also adopting to the changes of time and seeing what the world needs. (example of which is the farming practice in the Philippines) – when Filipinos discovered that the land was so fertile for rice production, the country focused on it thereby attaining food sustainability and the capacity to export the excess goods especially during the Spanish time when carabaos and plows were introduced to the farmers. The problem is, after 300 years, we have not yet gone out of the carabao part, and our food productivity simply cannot meet the demand of our own country anymore. This is an example where a supposed to be advantage of a country has disabled from attaining comparative advantage due to technology in relation to productivity and demand.

This theory on my personal point of view is about countries who try to produce goods even if they don’t have the capacity to produce effectively or as competitively as other countries especially if the country “trying” to produce aims to export the products it forcefully produced, because it will be expensive considering that we put labor and capital as the basis of pricing things. Buyers in the international economic scene will always prefer the cheaper one. If there is one thing I learned from David Ricardo that the rest of us should also learn, is the fact that having a protective economy such as the Philippines who try to produce goods it is not designed to produce and/or  failing to enhance our method of production,  will only make us poorer in the long run until we finally cease to survive.

Written by monkeybanana

March 21, 2009 at 11:55 PM

David Ricardo, as you like it

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David Ricardo was a blogger!  Check out the concept of comparative advantage in Ricardo’s very own words, courtesy of Morgan Rose.  

Students, please note that Ricardo’s book is searchable.

Written by Orlando Roncesvalles

March 6, 2009 at 8:59 AM