David Ricardo attained great wealth as a stockbroker and a loan broker, however at the age of 27, after reading Adam Smith's, "Wealth of Nations", he focused all of his energy on economics. He was an expert in the theory of land rent and of cur rency and, like other classical economists of his time, placed emphasis on production rather than consumption.
Ricardo is probably best known for his theory of comparative advantage, which states that international specialization pays for a nation. For the sake of simplicity, Ricardo worked with only two countries and two goods, and he measured all costs in te rms of hours of labor. He found that even if "one of the two regions is absolutely more efficient in the production of every good than is the other, if each region specializes in the products in which it has a comparative advantage, (greatest rel ative efficiency), trade will be mutually profitable to both regions. Real wages of productive factors will rise in both regions."
Ricardo is also commonly identified with the law of diminishing returns, which he articulated in his work, "Essay on the Influences of a Low Price of Corn on the Profits of Stock". According to the law of diminishing returns, if all inputs into pr oduction except one are held constant and the amount of the variable input is increased, output will increase, but at a decreasing rate.
Another important contribution by Ricardo was his theory of rents, which stated that as more land was cultivated, farmers would have to begin using less productive land. However, the output would sell for the same amount regardless of the productivity of the land. As a result , farmers would be willing to pay a higher rent for the more productive land. This would lead landlords to raise the rent and "the rate of profit throughout the economy will decline to the rate of profit in marginal agricultural i nvestments." This decline in profit will cause capital investment to decline until the economy reaches a stationary state in which only the landlords profit. As was common among all classical economists of this time, the effects of technological impro vement was greatly under-estimated.
Works by David Ricardo:
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