A

PRESENTATION
ON
“To study the Ricardian theory of
Income Distribution”

SUBMITTED TO: SUBMITTED BY:

MS. SWATI TANU

ASSOCIATE PROFESSOR 2333009
MA (ECONOMICS)
 Introduction
The economy is divided into two broad sectors– agriculture and
industry.

 Agriculture occupies a crucial place in the Ricardian Model,

since the forces working in the agricultural sector determine the
distributive shares in industry.

 Ricardo's theory was based on two separate principles which we

may term the "marginal principle " and the " surplus principle "
respectively. The " marginal principle " serves to explain the
share of rent, and the " surplus principle " the division of the
residue between wages and profits.
 MEANING

The Ricardian Model states that countries

specialise in producing goods for which they
have a comparative advantage and engage in
trade, so both countries can achieve greater
overall efficiency and welfare. This model
underscores the benefits of international trade .
 DEFINITION
Ricardian theory was based on two separate
principles which we may term the marginal
principle & the surplus principle , respectively.
The marginal principle ‘ serves to explain the
share of rent’.
The surplus principle ’the division of the
residue between wages & profits’.
 Assumptions
Ricardo’s theory is based on three assumptions:
1) Law of diminishing returns operates in agriculture;
2) The Malthusian law of population, according to which
population will increase with increase in wage rate. Wage
rate tends to be equal to subsistence level in the long run.
3) Profits are a necessary incentive for capital accumulation,
which is the key to economic growth.
 The distribution of national output among three shares:
rents, wages and profits.
Ricardian Theory of Income
Distribution
Diagrammatic
Representation
of richardian
theory
Diagram :1
 The Figure presents the situation of agricultural sector of the economy.

i. X-axis measures amount of labour employed on agricultural land.

ii. Y-axis measures agricultural product produced.
iii. APL and MPL curves respectively represent the average and marginal productivity
of labour.
iv. They are downward sloping due to operation of the law of diminishing returns.
v. When OM labour is employed in agriculture, then the marginal product of labour
is ME and the average product of labour is MD.
vi. The difference between marginal product and average product ED represents therent
earned on land per unit of labour employed.
vii. Out of the total product OMDC, the total rent earned by land is equal to the
area BEDC(that is ,ED multiplied by BE)
viii. The remaining product OMEB is divided between labour and capital.
Diagram : 2
 In the Ricardian theory,wage rate of labour is not
determined by marginal productivity of labour, as is
generally assumed in neo-classical
economics.

 Subsistence level, alevel which is just sufficient to keep

the labour force living at a minimum.

 In the theory,marginal product of labouris assumed to

be equal to the sum of wages and profits (i.e., MPL =
W+P).

 Suppose the minimum subsistence level is OW amount

of the agricultural output(i.e., corn), then thewage rate
determined in the long run is OW.
Criticism of Ricardian theory of
Income Distribution
 No explanation about long run share of rent.
 Fear of population explosion .
 Principle of diminishing returns .
 Contrary to empirical facts .
 Unduly gloomy prediction .
 Conclusion
Ricardo's Theory of the Functional
Distribution of Income, Ricardo was able to
work out how a society's total out put was
distributed to the different classes. Falling
Rate of Profit: An important conclusion is
that as an economy develops, only landlords
benefit.
THANK
YOU