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Ricardo’s Theory of Distribution and Growth

Ricardo’s Theory of Distribution and Growth. David Ricardo (1772-1823). “To determine the laws which regulate this distribution, is the principal problem in Political Economy.”. Ricardo’s Theory is Important for the Following Reasons:. Provides us with vision of the future

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Ricardo’s Theory of Distribution and Growth

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  1. Ricardo’s Theory of Distribution and Growth

  2. David Ricardo (1772-1823) “To determine the laws which regulate this distribution, is the principal problem in Political Economy.”

  3. Ricardo’s Theory is Important for the Following Reasons: • Provides us with vision of the future • Explains why in Ricardo’s view investment opportunities decline • Explains in simple terms the reason for rent

  4. Historical Backdrop: Corn Laws • Corn Laws • imposed a tariff on the importation of agricultural products • British Parliament was dominated by the landowning classes

  5. Distribution and Production • Ricardo sought to show how changes in distribution affect production • Ricardo contended that as the economy grows, rents rise, squeezing profits • As profits are squeezed, economic growth declines

  6. Assumptions • Say's law--supply creates its own demand, and whatever is saved is invested (accumulated). • Labor theory of value, prices are proportional to the quantities of embodied labor. • Agriculture is labor intensive, manufacturing is capital intensive.

  7. Land is fixed and differs in fertility • three classes

  8. Rent • Return to an factor of production for which there are no substitutes or no “good” substitutes • Examples: land, a particular location, a living legend, etc.

  9. Ricardian Rent • Ricardo defined rent as follows: • different between output on the most and least fertile land in cultivation • difference between costs of production on the most and least fertile lands in cultivation

  10. The End of Capitalism?

  11. Implications? • Why was Ricardo’s position regarding the corn laws? Explain. • What policies did Ricardo recommend? • What happens to economic growth over time as the population increases? Why? • How does Ricardo’s theory reflect his class interests?

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