Question

Explain David Ricardo's theory of rent and international trade

Answer 1

David Ricardo's Theory of Rent

As per Ricardian Theory, Rent is that portion of the product received from the earth which is given back to landowners for using the original powers of the soil to produce certain output.

The concept of charging rent arises as there is a difference in the fertility of land and the location of the land. Moreover, land is nature's gift, so there should be no charge on its usage. It is only producer's surplus being the owner of the land.

As land being in scarcity , so it is charged with rent. Moreover, the fertility of land varies and thus the producer of more fertile land receive higher surplus.

David Ricardo's Theory of International trade

As per Ricardian Theory of International trade, the countries get involved in trade based on comparative advantage and specialization. Countries should produce only those commodities in which they have got specialization and are able to produce at the lowest possible cost. Rest of the commodities should be imported from other countries which have got specialization. Thus there is a rise of international trade amongst the countries.

For instance, china is able to manufacture mobile phones at low cost because of the labor specialization in the same. SO other countries would either import the mobile phones from China or outsource the production of mobile phones to China.