1. PRESENTATIONS DONE IN PARTIAL
FULFILLMENT OF THE COURSE
ECONOMICS FOR DEVELOPMENT AGEC 470
TOPIC PRESENTED: RICARDIAN THEORY OF
ECONOMICS DEVELOPMENT.
PRESENTER: MULAMA KENNEDY
MASINDE
LECTURE: MR. CLIVE MAIRURA.
DATE 12TH OCT 2012
2. DAVID RICARDO THEORY OF REDISTRIBUTION OF RESOURCES.
David Ricardo (18 April 1772 – 11 September 1823)
was a British political economist and stock trader. He
was often credited with systematizing economics, and
was one of the most influential of the classical
economist, along with Thomas Malthus, Adam Smith,
and John Stuart Mill. Perhaps his most important
contribution was the law of comparative advantage, a
fundamental argument in favor of free trade among
countries and of specialization among individuals.
3. • Like Smith David also produced his views on
economy development in his book Principles
of Political Economy and taxation. The book
concludes that land rent grows as population
increases. It also clearly lays out the theory of
comparative advantage, which shows that all
nations can benefit from free trade, even if a
nation lacks an absolute advantage in all
sectors of its economy.
4. Ricardo’s theory
• He never propounded any theory of
development. He simply discussed the theory
of distribution. The theory is based on
marginal principle explains the surplus
principles, the division of the remaining shares
between the wages and profits
5. ASSUMPTIONS OF THE THEORY
Ricardian theory is based on the following assumptions:-
• That all land is used for production of corn and the working
forces in agriculture help in distribution in the industry.
• That the law of diminishing returns operates on land, that the
supply of land is fixed
• Demand of corn is perfectly inelastic
• That labor and capital are variable inputs
• That there is capital homogeneity
• That capital consist of the circulating capital
6. • State of technical knowledge is given
• All workers are paid a subsistence wages
• Supply price of labor is given and constant
• Demand for labor depends upon the accumulation of
capital and that both demand and supply prices are
independent of marginal productivity of labor
• There is perfect competition capital
• Accumulation results from profits
7. • In the Ricardian system the whole economy consists
of one large huge farm fixed in supply which is
engaged in producing only corn by applying
homogenous units of labor and capital. It grows on
the basis of interrelations of these groups in the
economy. They are landlords, capitalist and laborers,
among who the entire production of land is
distributed.
• Total national output is distributed among these three
groups as rent, profits and wages respectively
8. Division of rents, profits and wages.
• Given the total output of corn the share of each group
can be attained and determined. Rent per unit of
labour is the difference between the Average and
marginal product of labour. i.e. total rent= the
difference between the Average productivity of labor
(APL) and marginal productivity of labour (MPL)
multiplied by quantity of labour and capital applied
on land
• Thus output of total corn produced and sold rent has
the first right and the residual is distributes between
wages and profits, while interest is included in
profits.
9. Corn Model
TP
TP-Rent
TP
L
L’
Ws x L
Wages
Profits
Rent
At L’ profits are high. Capital accumulation
occurs and the wage fund grows, raising
wages above Ws. Population grows gradually
pushing wages back toward Ws. But real cost
of Ws rises due to diminishing returns and
profits are squeezed out.
Stationary
state
TP’
L”
10. Rent.
• He defined rent as "the difference between the
produce obtained by the employment of two equal
quantities of capital and labor." The model for this
theory basically said that while only one grade of land
is being used for cultivation, rent will not exist, but
when multiple grades of land are being utilized, rent
will be charged on the higher grades and will increase
with the ascension of the grade. As such, Ricardo
believed that the process of economic
development, which increased land utilization and
eventually led to the cultivation of poorer
land, benefited first and foremost the landowners
because they would receive the rent payments either
in money or in product.
11. Malthus's criticism and Extrapolation of the problem of Ricardian Rent
• In demonstrating that Ricardian Rent
constitutes value for nothing (Ricardo was
momentarily neglecting Say's Law that all
savings by-definition-equals investment),
Ricardo overlooks that such value-for-nothing
doesn't necessarily disappear upon "mis-
payment" to a landlord.
12. Capital accumulation.
• According to Ricardo, capital accumulation is
the outcome of profits because profits leads
to saving of wealth which is used for capital
formulation. Capital accumulation depends on
two factors:- a.) the capacity to save and b.)
the will to save. The capacity to save is more
important in capital formulation and
accumulation.
13. • This depends upon the net total output after
meeting the cost of workers subsistence. The
larger the surplus, the larger the will to save.
Ricardo tried to show that it is only under
different conditions that capital accumulation
will reduce profits. In this system wages plays
an important role in determining income
between capital and labour.
14. • The wage rate increases when the prices of
commodity forming the subsistence of the
workers income increase. the commodities
consumed by the workers are primarily
agricultural based and as demand for food
increases, less fertile land is brought to use.
For this purpose, to produce unit of the
product more workers are needed.
15. • Demand for labour starts to rise which raises
wages. Thus wages increase with the rise in
price of corn and price of corn decline, in such
situation rent also increases which absorbs
the rise in the prices of corn, since wages also
increase profits declines.
16. The Ricardian theory of international trade
• He favors free trade as an important factor of
economic development. Profit rate can be saved from
declining by importing corn. The capital
accumulation will therefore continue to be high, but
importing of corn leads to fall in the demand of
labour. on the other hand landlords and capitalist do
not think it fit to import cheap corn from foreign as a
result their profits declines
17. PriceCheese/Wine
Foreign Home World
+ = Quantity
This is how the worldwide free trade
price is determined. Note that the free
trade price ( ) must lie between the two
countries’ autarky prices ( ).
2
1/2
It follows that Home will export Cheese to
Foreign. Therefore, Foreign will export
Wine to Home.
Thus, Ricardian trade follows the Principal
of Comparative Advantage: each country
exports the good that it can produce at a
lower opportunity cost.
18. Comparative Advantage
• Each country exports the good that it had
been producing at a cheaper relative price in
autarky
• Relative Price = Opportunity Cost
• Therefore, each country exports the good for
which its opportunity cost is lower
• This is called the Principle of Comparative
Advantage
19. Misconceptions About
Comparative Advantage (cont.)
2. Free trade with countries that pay low wages hurts high
wage countries.
– While trade may reduce wages for some workers, thereby affecting
the distribution of income within a country, trade benefits
consumers and other workers.
– Consumers benefit because they can purchase goods more cheaply
(more wine in exchange for cheese).
– Producers/workers benefit by earning a higher income (by using
resources more efficiently and through higher prices/wages).
20. Misconceptions About
Comparative Advantage
1. Free trade is beneficial only if a country is more
productive than foreign countries.
– But even an unproductive country benefits from free trade by
avoiding the high costs for goods that it would otherwise have to
produce domestically.
– High costs derive from inefficient use of resources.
– The benefits of free trade do not depend on absolute
advantage, rather they depend on comparative advantage:
specializing in industries that use resources most efficiently.
21. Misconceptions About
Comparative Advantage (cont.)
3. Free trade exploits less productive countries.
– While labor standards in some countries are less than exemplary
compared to Western standards, they are so with or without trade.
– Are high wages and safe labor practices alternatives to trade?
Deeper poverty and exploitation (e.g., involuntary prostitution) may
result without export production.
– Consumers benefit from free trade by having access to cheaply
(efficiently) produced goods.
– Producers/workers benefit from having higher profits/wages—higher
compared to the alternative.
22. Criticism of the Ricardian theory of trade
• Neglects the input of technological- He pointed out that
improved technology in the industrial fields leads to the
displacement of labour and other adverse
consequences. I in the beginning technological progress
might counteract the action of diminishing returns, but
ultimately when the impact of technological impact
progress is exhausted diminishing returns sets in, and
economy moves towards stationary state
• Wrong notion of the stationary state- the Ricardian
view that the state reaches the stationary state
automatically is baseless, because no economy reaches
that state where profits are increasing, production rising
and capital accumulation taking place
23. • Impracticable laissez fair policy- the theory is based
on the impracticable laissez faire
• Neglects institution factors – one of the principle
defects of the Ricardian theory is that it neglects the
role of industrial and institutional factors. They have
been assumed, though very important in economic
development.
• Distribution rather than growth theory- according to
Schumer, the Ricardian theory is not growth theory
but distribution which distributes the shares of
workers, landlords and capitalist. Even in this, he
regards the share of land as a primary and residual
share of labour and capital.
24. CONCLUSION
• Despite these weakens the theory points towards importance of
capital accumulation through agricultural development and
increase in the various sources of savings and profits rates. The
two basic assumptions of the theory of diminishing returns to
land and Malthusian principle on population are of particular
significance for under developing nation
• In an underdeveloped country population increases faster than
increase in food production . there is the absence of technical
improvement on land. As a result the law of diminishing
returns works with full force and productivity falls. The supply
of available land being scare in relation to its demand, rents
are high, but wages are low because labour supply is in excess
of its demand and has little tendency to substitute capital for
labour.
