ABSTRACT
This chapter focuses on David Ricardo's argument with regard to the saving of labour in trade based on the principle of comparative advantage. It exemplifies the principle in terms of the case of two countries whose currencies are non-convertible. The chapter shows that the principle presupposes arbitrage opportunities that can be exploited by merchants. It deals with the case with gold as the universal means of exchange. In this case absolute cost advantages of one country over another one trigger a specie-flow mechanism that tends to erode these advantages and brings about a situation in which absolute costs in the two countries reflect comparative advantages. Ricardo relies on the labour theory of value because it allowed him to simplify matters without, he felt, distorting by too much the properties of the highly complex system under consideration. Ricardo compared the extension of foreign trade to 'improvements in machinery', that is, technical progress.
