1.

) List down all the key variables in David Ricardo’s theory of comparative advantage and

discuss how they related to each other / how they work together.

Comparative advantage is when a country produces a good or service for a lower opportunity

cost than other countries. Opportunity cost measures a trade-off. A nation with a comparative

advantage makes the trade-off worth it. The benefits of buying their good or service outweigh the

disadvantages. The country may not be the best at producing something. But the good or service

has a low opportunity cost for other countries to import.

The key variables in David Ricardo’s Theory of Comparative advantage are:

 International Free Trade

 Specialization of Labor

 Trade Protectionism

 Monetarism

They can relate to each other because international free trade and specialization of labor are ideas

that he get from Adam Smith. Trade protectionism doesn't work in the long run. Political leaders

are always under pressure from their local constituents to protect jobs from international

competition by raising tariffs. But that’s only a temporary fix. In the long run, it hurts the nation's

competitiveness. It allows the country to waste resources on unsuccessful industries. It also forces

consumers to pay higher prices to buy domestic goods. And in Monetarism he was the first person

to point out that significant increases in the money supply create inflation.

2.) What are the prediction of David Ricardo’s theory of comparative advantage?

David Ricardo prediction in the theory of comparative advantage is that in arguing for Free Trade,

Ricardo formulated the idea of comparative costs, today called COMPARATIVE ADVANTAGE a very
subtle idea that is the main basis for most economists’ belief in free trade today. The idea is this:

a country that trades for products it can get at lower cost from another country is better off than if

it had made the products at home.

References:

1817. on the Principles of Political Economy and Taxation. In The Works and Correspondence
of David Ricardo. 11 vols. Edited by Piero Sraffa, with the collaboration of M. H. Dobb.
Cambridge: Cambridge University Press, 1951–1973. Available online
at http://www.econlib.org/library/Ricardo/ricP.html
https://www.thebalance.com/comparative-advantage-3305915