The Ricardo Principle Definition

The Ricardo Principle is named after the English economist, David Ricardo. It states that the comparative advantage of a country in producing a certain good or service lies in its ability to produce that good or service at a lower opportunity cost than any other country. In other words, a country has a comparative advantage in producing a good or service if it can produce that good or service more efficiently than any other country.

The principle was first set forth by Ricardo in his 1817 book, On the Principles of Political Economy and Taxation. He used the example of England and Portugal to illustrate his point. At the time, England had an absolute advantage over Portugal in both wine and cloth production. That is, England could produce more wine and cloth than Portugal could with the same amount of resources. However, Ricardo argued that England should specialize in cloth production and trade with Portugal for wine because England had a comparative advantage in cloth production.

Ricardo’s theory relies on the assumption of free trade between countries. Free trade is when countries can buy and sell goods and services without restrictions or tariffs. Today, there are various degrees of free trade between countries. For example, some countries may have low tariffs on certain goods while others may have high tariffs. The Ricardo Principle still applies even if there are tariff barriers because it only looks at the opportunity cost of production.