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Ricardo and China

Mar 18, 2010 • Developing Economies, Economic Thinkers, International Trade and Finance, Thinking Economically • 184 Views    No Comments

What happens when you build an airport and nobody uses it?  China has an answer. Although China faces underutilization as it develops its transportation infrastructure in the air, by rail and roads,  it seems to be continuing.

China’s policy took me to a recent Econtalk podcast from Russ Roberts.  Focusing on trade, Adam Smith, and David Ricardo, he began by saying that, “self-sufficiency is the road to poverty”. By contrast, affluence grows when people specialize and trade.  However, people can sustain specialization only when they have demand.  And when demand grows, specialization will spawn technology, knowledge, and wealth.  A transportation network is a fundamental requisite for specialization and the innovation that Roberts says market size stimulates.

The Economic Lesson

As the rationale behind trade, David Ricardo’s principle of comparative advantage says that overall productivity will increase when people specialize in whatever has the least opportunity cost.  Saying specialization has so many benefits that even when two nations have identical opportunity costs they should trade, Roberts takes Ricardo a step further.

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