Riccardo and Mill

Question 1

What theories did Riccardo and Malthus disagree on?

Answer 1

1. Effective demand - Malthus argued it would cause market gluts vs. Riccardo thought in the long term S=D and market gluts exist only in the short-term
2. Corn laws - Malthus argued they would enrich land owners vs. Riccardo suggested to abolish them as there are gains from international trade

Question 2

Briefly explain Riccardo’s labour theory of value and how it differed from Smith

Answer 2

Use the 93% approximation and express capital costs as labor costs ( + include production time costs)

Question 3

What was Riccardo’s theory of rent?

Answer 3

Prices determine rents but rents do not determine prices and should therefore not be included in the theory of price formation.

Question 4

What did Smith and Riccardo say trade should be based on?

Answer 4

Smith - absolute advantage

Riccardo - Comparative advantage

Question 5

Did Riccardo’s labour theory of value hold with his theory of comparative advantage?

Answer 5

“Principle that determines relatives prices in a single country does not hold in the context of international exchange.”

Question 6

What did he suggest countries should do so that population growth doesn’t lead to a lower economic growth?

Answer 6

Allow imports so that food prices do not have to go up (+ food availability increases)

Question 7

What theories do we discuss today of his?

Answer 7

Theory of comparative advantage
Marginal analysis
Law of diminishing returns

Question 8

In what way did Mill revolutionize economic thinking?

Answer 8

Introduced the demand side of price formation > marginalist school of thought

Question 9

List out the innovations Mill made to the price theory.

Answer 9

1. Price where X=M
2. Prices adjust to where S=D
3. General equilibrium where AD=AS

Question 10

Did Mill accept Riccardo’s wage fund theory?

Answer 10

Initially he did then rejected it because he thought trade unions were in reality unable to influence wages