I’m reading a Galbraith book, The Predator State, so forgive me if I inundate you with economic facts. But, since we are in the banking crisis I can’t think of a better time to understand and learn some of the things that many of you numbnuts don’t know or conveniently forget when it comes to our economy.
In his 1817 book, On the Principles of Political Economy and Taxation, David Ricardo used the example of Portugal and England’s trading of wine and cloth to illustrate the benefits of specialization and trade. His writing served as the basis for the principle of comparative advantage, under which total output will be increased if people and nations engage in those activities for which their advantages over others are the largest or their disadvantages are the smallest.
Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade.
Effects on the economy
Conditions that maximize comparative advantage do not automatically resolve trade deficits. In fact, in many real world examples where comparative advantage is attainable may in fact require a trade deficit. For example, the amount of goods produced can be maximized, yet it may involve a net transfer of wealth from one country to the other, often because economic agents have widely different rates of saving.
As the markets change over time, the ratio of goods produced by one country versus another variously changes while maintaining the benefits of comparative advantage. This can cause national currencies to accumulate into bank deposits in foreign countries where a separate currency is used.
Macroeconomic monetary policy is often adapted to address the depletion of a nation’s currency from domestic hands by the issuance of more money, leading to a wide range of historical successes and failures.