Question

What does the ricardian theory state?

Answer 1

The Ricardian Theory was a theory developed by the classical economist David Ricardo in 1817, where he introduced the law or principle of comparative advantage.

The principle of comparative advantage states that an economic agent will specialize in producing and selling a product or service for which it has a comparative advantage, which is a situation in which a specific agent is able to produce a certain good more efficiently than its competitors (with smaller opportunity costs).

This principle explains the dynamics of international trade and why countries engage in trading some specific goods, for example, why a country buys a product abroad instead of producing it in its territory. Countries will always export the product for which the hold a comparative advantage and import others.

Answer 2

Ricardian equivalence is an economic theory that suggests that when a government tries to stimulate an economy by increasing debt-financed government spending, demand remains unchanged.