Ricardo's theory of value and foreign trade
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Draft of Presentation on Ricardo and Foreign Trade
Background:
1) Ricardo states that relative prices are determined by relative labor times
2) Theory of money: a country with a trade surplus has gold inflows which cause a rise in all commodity prices
A country with a trade deficit has a gold outflow which a decrease in the general price level
3) Absolute advantage: a country can produce a commodity cheaper than another country.
Comparative advantage is a countries ability to produce certain goods efficiently to another country even if that other country produces the good more efficiently.
The comparative advantage is the motive of foreign trade.
Ricardo’s theory in Chapter VII:
Balanced trade
|
|
|
Wine |
120 workers |
80 workers |
Cloth |
100 workers |
90 workers |
“The same rule which regulates the relative value of commodities in one country does not regulate the relative value of the commodities exchanged between two more countries.” (p. 99)
At this point Ricardo abandons the labor theory of value.
Trade will only take place if the commodity produced can be sold for more money abroad than at home.
Assume:
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|
|
Wine |
45 ₤ |
50 ₤ |
Cloth |
50 ₤ |
45 ₤ |
Now assume that there is an improvement in
Foreign trade will not affect necessarily profits, unless the import of commodities affects domestic wages. For example: If corn can be imported cheaper than produced domestically wages will fall.
“Foreign trade and the Law of Value”
Shaikh’s main points:
1) Intention to redevelop/ discover Marx’s theory on foreign trade
2) There are benefits from trade but not necessarily for the nation as a whole. Trade is undertaken by individual capitalists who engage in trade because they are able to increase their profits through foreign trade. Hence, individuals benefit not the community.
3) Neoclassical versus Ricardian theory: different theory of price but similar theory of money. Both believe that foreign trade will be to the benefit of every nation involved.
4) Modern theory of trade as explained in Hecksher-Ohlin model: assumptions: full utilization of resources, same production technologies across regions, same demand across regions. Thus the only difference that remains is the different endowment in capital and labor. Countries with abundance in capital will export capital intensive goods and countries with a large labor force will export labor-intensive goods. Consequently, factor prices are equalized. This mechanism corresponds to Ricardo’s price adjustments through gold flows.
5) Shaikh: under an independent monetary system the depreciation and the appreciation of the exchange rates have the same effect as Ricardo’s outflow and inflow of gold.
6) 3 orthodox critiques of Ricardo:
a) Keynsians: accept Ricardo’s general principles of trade but seek to modify it to some extent.
b) Leontief and Chenery give empirical evidence against the Hecksher-Ohlin model
c) Argument that Ricardo’s law of trade s correct in principle but that it no longer holds today (government intervention, demise of competition, demise of old standard, loss of wage and price flexibility)
7) Marxist critiques
accept
8) Shaikh’s conclusion: In Marx’s logic law of comparative advantage is not valid. The developed country will not specialize in the export of one good but will export both. The underdeveloped country will end up with a trade deficit. Hence, “free trade will ensure that the underdeveloped capitalist regions will either have to confine their import needs to the low levels supported by exports, or else they will be chronically in deficit and perpetually in debt” (p.301). FDI might offset the trade deficit but “at the expense of destroying native industries, blocking the development of the indigenous forces of production, undermining the terms of trade, and generating corresponding capital outflows”.
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