‘On Foreign Trade’

In the first chapter of his Principles1, Ricardo stated clearly that, in general, the relative value of any two commodities is not determined exclusively by the quantities of labour embodied in those two commodities. Relative value would be so determined, he said, only for commodities in the production of which fixed and circulating capital were used in the same proportions, the fixed capital being of equal durability for both commodities and both commodities requiring the same time to be brought to market.2 Having recognised clearly that price ratios would normally diverge from the corresponding ratios of quantities of embodied labour, Ricardo maintained that the magnitude of these divergences would be small.3 It was perhaps on this ground that in the seventh chapter of the Principles, ‘On Foreign Trade’, Ricardo assumed that no-trade price ratios would equal the corresponding ratios of quantities of embodied labour.4 This assumption is implicitly made throughout the chapter and is made explicitly in the statement that ‘The quantity of wine which [Portugal] shall give in exchange for the cloth of England, is not determined by the respective quantities of labour devoted to the production of each, as it would be, if both commodities were manufactured in England, or both in Portugal.’5 Basing his analysis on the assumption that no-trade price ratios will equal the corresponding ratios of quantities of embodied labour, Ricardo obtained, amongst others, the following three important conclusions concerning foreign trade.