1-1

LESSON SUMMARY

1. David Ricardo's theory of comparative advantage posits that countries export the goods they have
abundant production factors for, while they import the goods for which they have scarce production
factors. Relative intensities of production factors (land, labor, and capital) determine the comparative
advantage of a country.

2. Using the above premise as a starting point, two Swedish economists, Eli Heckscher and his student
Bertil Ohlin, from Stockholm School of Economics, in the 1920s, studied how a country could gain
comparative advantage by producing products that utilized factors that were in abundance in the
country.

3. The Heckscher-Ohlin theory or H-O theory is based on a country's production factors-land, labor, and
capital; hence, the theory is also called the factor proportions theory or the resources and trade theory.
Hecksher and Ohlin determined that the cost of any factor or resource was a function of supply and
demand.

4. Many elaborations of the model were provided by Paul Samuelson after the 1930s and thus,
sometimes the model is referred to as the Heckscher-Ohlin- Samuelson (HOS) model.

5. In the 1950s and 1960s, some noteworthy extensions to the model were made by Jaroslav Vanek, and
so occasionally the model is called the Heckscher-Ohlin-Vanek model.

1-2

KEY TAKEAWAYS

1. Bartering involves a direct trade/exchange of goods and services.

2. The advantage of bartering is that it does not involve money and it is very simple.
3. However, it is difficult to find people who need what the other people have and there is no
standard measure of value.
4. Even today, there are swap markets, online auctions, and numerous websites that offer online
bartering arrangements.
5. The early humans had very little needs and there was no need for exchange of goods.
6. As the number of people increased, they started forming groups and travelled long distances to
find food.
7. Gradually, however, intergroup interaction started and this paved the way for a system of
trading.
8. As cultivation and farming flourished, there was no shortage of food. They started trading
surplus goods and the system of trade flourished.
9. The history of bartering can be traced back to 6000 BC, when the barter system was introduced
by the tribes of Mesopotamia, then adopted by the Phoenicians, and improved by the
Babylonians.
10. Salt was so valuable at that time that the salary of Roman soldiers was paid in salt.
1-3

LESSON SUMMARY

1. It is believed that the first recognizable metal coins appeared in China, during 1000 BC. The earliest
currency of China of the eighth century BC consisted of miniature hoes and billhooks (pruning
implements), with inscriptions indicating the authority.

2. Sometime around 770 BC, miniature replicas of tools and weapons cast in bronze were used by the
Chinese as a medium of exchange. The small bronze celts (prehistoric tools resembling chisels) and
bronze rings played a monetary role. Due to impracticality, these tiny daggers, spades, and hoes were
eventually abandoned for objects in the shape of a circle. These objects became some of the first coins.

3. Around 700 BC, the Chinese moved from coins to paper money. By the time Marco Polo (the Venetian
merchant, explorer, and writer) visited China in approximately AD 1271, the emperor of China had a
good handle on both the money supply and various denominations.

4. The first region of the world to use an industrial facility to manufacture coins (a mint) was in Europe,
in the region called Lydia (now western Turkey).Minting is the process of making a coin by stamping
metal. In 600 BC, around the time China started using paper money, Lydia's King Alyattes minted the list
offcial currency, non-standardized coins from electrum (a naturally Occurring alloy of gold and silver)
that did not have a standardized value al

5. King Croesus (son of King Alyattes) of Lydia (reigned 560-546 BC) produced a bimetallic system of pure
gold and pure silver coins. The Croeseid, anciently Kroiseioi stateres, was a type of coin, either in gold or
silver, which was minted in Sardis by King Croesus, from around 550 BC. Croesus is credited with issuing
the first true gold coins with a standardized purity for general circulation, and the world's first bimetallic
monetary system.

6. The foundation deposit of the Artemisium (temple to Artemis) at Ephesus shows that electrum (which
the Greeks called "white gold") coins were in production even before Croesus, possibly under King
Gyges.
7. The European colonial governments in North America issued the first paper currency in Canada (then
a French colony). Instead of going back to a barter system, the colonial governments issued IOUS
(promissory notes) that traded as a currency.

8. According to Adam Shortt, the great Canadian economic historian, the first regular system of exchange
in Canada involving Europeans occurred in Tadaoussac in the early seventeenth century, where French
traders bartered each year with the Mantagnais people (also known as the Innu) trading weapons, cloth,
food, silver items, and tobacco for animal pelts. especially those of the beaver.

9. The first colonial settlement at Quebec on the St. Lawrence River was established by Samuel de
Champlain in 1608. The beaver pelt was the one universally accepted medium of exchange in the infant
colony, although wheat and moose skins were also employed as legal tender. As the colony expanded
and its economic and financial needs became more complex, coins from France came to be widely used.

10. Silver and copper coins designed especially for the colonies was minted in 1670. These coins could
not be circulated in France. While apparently intended only for the West Indies, a small number of these
coins are believed to have circulated in Canada.

11. The West Indies are a chain of islands in the Caribbean Sea and Atlantic Ocean divided into three
groups: The Bahamas, the Greater Antilles, and the Lesser Antilles.

12. During the mid-1600s, Spanish dollars (piastres) began to circulate in the French colonies These over-
stamped Spanish dollars represent the first distinctive Canadian coins.

13. The livre (French for "pound" and the name of both units of account and coins) was the currency of
the Kingdom of France and its predecessor state of West Francia from 1781 to 1794.

14. In 1685, Jacques de Meulles, Intendant of Justice, Police, and Finance came up with the temporary
issuance of paper money printed on playing cards. Card money served as money in Canada, just as coin
did in France.

15. In 1717, all debts and contract in Canada became payable in monnoye de France.

16. Copper coins were introduced in 1722, but they were not well received by merchants. Notes issued
by private individuals based on their own credit standing also circulated as money. The government
issued promissory notes called ordonnances and treasury notes called acquits, which began to circulate
as money.

17. In March 1729, card money was legal tender for all payments and replaced the ordonnances in
circulation. Legal tender means currency, such as coin and paper money, is valid and sufficient for the
payment of debts. A rapid increase in the amount of paper in circulation during the late 1750s led to
rapid inflation. Inflation means increase in prices, reducing the purchasing power

of money. 18. On October 15, 1759, the French government suspended payment of bills of exchange
drawn on the Treasury for payments of expenses in Canada until three months after peace was restored.
Paper money traded at a sharp discount and ultimately became worthless following the British conquest
in

1760. Gold and silver, which had been hoarded, came back into circulation.

19. Settlement of the paper obligations issued by the colonial authorities in Canada was included in the
Treaty of Paris, signed in February 1763, which ended the war between Great Britain and France.

20. The advent of paper money led to an increase in international trade. Today, physical currency is not
required, as electronic money is widely used for monetary transactions. In fact, we now have
digital/virtual currencies or cryptocurrencies.

1-4

KEY TAKEAWAYS

1. Barter was the means of trade long before the Spaniards came to the Philippines.

2. Barter was inconvenient so cowries, glossy, often colorfully patterned shells, was adopted as a
medium of exchange.

3. Barter rings, made in gold called piloncitos, were the first local form of coinage. These had a flat
base that bore an embossed inscription of the letters "MA" or "M" believed to be the name by
which the Philippines was known to Chinese traders.
4. The cobs or macuquinas (silver coins) were the earliest coins brought in by the galleons from
Mexico and other Spanish colonies. These silver coins usually bore a cross on one side and the
Spanish royal coat-of-arms on the other.

5. The barrilla, a crude bronze or copper coin worth about one centavo, was the first coin struck in
the country as ordered by the Royalty of Spain. The Filipino term “barya,” referring to small
change, had its origin in barrilla.

6. Gold coins with the portrait of Queen Isabela were minted in Manila.

7. Silver pesos with the profile of young Alfonso XIII were the last coins minted in Spain.

8. The pesos fuertes, issued by the country’s first bank, the El Banco Español Filipino de Isabel II,
were the first paper money circulated in the country.

9. The Philippine Republic of 1898 under General Emilio Aguinaldo issued its own coins and paper
currency backed by the country’s natural resources. Two types of two-centavo copper coins were
struck at the Malolos arsenal.

10. One-peso and five-peso revolutionary notes were printed as Republika Filipina Papel Moneda de
Un Peso and Cinco Pesos.

11. With the coming of the Americans in 1898, the Philippines became one of the most prosperous
countries in East Asia. The Americans instituted the gold standard and pegged the Philippine
peso to the American dollar at the ratio of 2:1.

12. The gold standard is a monetary system where a country’s paper money has a value directly
linked to gold; countries agreed to convert paper money into a fixed amount of gold per unit of
currency.
13. The US Congress approved the Coinage Act for the Philippines in 1903. The coins issued under
the system bore the designs of Filipino engraver and artist, Melecio Figueroa. Coins in
denomination of one-half centavo to one peso were minted.

14. El Banco Español Filipino was renamed Bank of the Philippine Islands in 1912. All notes and coins
issued up to 1933 used English. Beginning May 1918, treasury certificates replaced the silver
certificates series, and a one-peso note was added.

15. Two kinds of notes circulated in the country during the outbreak of World War II-war notes in
high denominations issued by the Japanese Occupation Forces dubbed as “Mickey Mouse”
money and guerrilla notes or resistance currencies in low denominations issued by different
provinces and municipalities.

16. Old treasury certificates overprinted with the word “Victory” was used as currency when the
Philippines gained independence from the United States following the end of World War II.

17. With the establishment of the Central Bank of the Philippines in 1949, the first currencies issued
were the English series notes printed by the Thomas de la Rue & Co., Ltd. In England and the
coins minted at the US Bureau of Mint.

18. The “Filipinization” of the republic coins and notes began in the late 60s and is carried through
to the present.

19. In the 70s, the Ang Bagong Lipunan (ABL) series notes printed at the Security Printing Plant were
circulated starting 1978.

20. In 1983, the Flora and Fauna coin series was initially issued.

21. The New Design Series of banknotes issued in 1985 replaced the ABL series.
 22. Ten years later, a new set of coins and notes were issued carrying the logo of the new Bangko
Sentral ng Pilipinas.

1-5

LESSON SUMMARY

1. Mobile payments are money rendered for a product or service through a portable electronic
device, such as a cell phone, smartphone, or a tablet device. It can also be used to send money
to friends or family members.

2. Near field communication (NFC) payments is the technology that allows two devices-your phone
and a payment’s terminal-to process contactless payments using close-proximity radio frequency
identification.

3. Sound wave-based (SWB) or sound signal-based (SSB) mobile payments or pay-by-sound uses an
advanced, ultra-low power, wireless transmission technology to transmit data via sound waves
that originate from POS terminals. Any phone with a microphone can pick up those waves to
complete a transaction without the need for internet.

4. Magnetic secure transmission (MST) is when a phone emits a magnetic signal imitating the
magnetic strip on the payer’s credit card, which the card terminal picks up and processes as if a
physical card was swiped through the machine. MST is secure as it uses a secure tokenization
system.

5. A mobile/digital wallet stores payment information on a mobile device, usually in an app that
utilizes different technologies in the payment process. They commonly work through complex
encryption and tokenization, a method using time-limited token numbers generated to process
the specific transaction using your already-encrypted card “stored” in your mobile wallet.

6. Quick response (QR) codes are the trademark of a type of matrix barcode (type 2D barcode)
readable by smartphones. This is more secure because your phone, that your card details are
securely connected to, confirms you are the owner of the card.
 7. A QR code has four important advantages:

a. It stores a large volume of data.

b. It can be scanned from a screen, not just paper.

C. It can be read even if part of the code is damaged.

c. It is safer because information can be encrypted.

8. Short message (or messaging) service (SMS), also called premium SMS payments, simply means
paying for products or services via a text message with the relevant information to the right
payee phone number and the payment amount is added to your mobile phone bill.

9. Direct carrier billing (DCB) is similar to SMS payments because you pay through your mobile
carrier instead of using bank or card details, the payment will then be added to your phone bill
or prepaid SIM card as with SMS payments.

10. Internet payments can be done on desktops, laptops, or even phones (as in mobile payment)
and can also be used to send money to friends or family members.

11. Wireless application protocol (WAP) payments used to be the most common facility on
smartphones through a more limited-capacity WAP browser or app.

12. Most credit cards and bank accounts have what we call “auto pay,” where payments to credit
cards or other bills, like for water, electricity, or whatever bills need to be paid, are scheduled to
be automatically paid on a certain date from funds of the payee with a certain bank. It can be
the bank doing the auto pay or the credit card company.
 13. Payment links or pay by link is most commonly referring to a button/link sent in an email, text
message, messaging app, or over social media where a checkout page opens up in an internet
browser where the recipient can enter their card details to process a transaction for a specified
merchant.

14. Neobank literally means “new bank,” and is from the Greek word neos meaning new.” It is an
umbrella term for the new generation of cutting-edge, fully digital thewing services. They all
operate online or through apps; hence, they are classified as a type of financial technology
(fintech) solution.

1-6

LESSON SUMMARY

1. Cryptocurrency or virtual/digital currency is any type of digital unit that is used as a medium of
exchange or a form of digitally stored value generated by agreement within the community of
virtual currency users. It is referred to as “digital gold.” It is also called “altcoins.” Cryptocurrency
is digital money-it is virtual and has no physical form.

2. Fiat currency or cash, on the other hand, is the real currency. Coins and paper money (bills)
issued and printed by the central bank of a country are fiat currency, fully-backed by the
government of a country and is acceptable as payment for public and private debts.

3. E-money is a digital representation of fiat currency stored in digital wallets

Or e-wallets. Any amount of currency stored in an electronic wallet (such as

GCash, PayMaya, Coins PH, GrabPay, and the like) is e-money, which can

Also be accepted as a “card payment” or can be withdrawn right away as cash.

4. Virtual currency, which is stored digitally, would still need to be converted first to Philippine
peso, then transferred to a destination wallet or be withdrawn as cash through different
mediums that are accepted in the country. In general, conversion is done through a virtual
currency exchange. In the Philippines, cryptocurrencies are regulated by the Bangko Sentral ng
Pilipinas (BSP).

5. Cryptocurrencies work through blockchain technology. Blockchain is a special kind of database, a

“distributed ledger” or a “global ledger” built on a data structure known as “blocks.” Blockchain
allows all participants to view the records and all the changes that happen in the database. Your
transaction data will be stored in a block, which is technically a list of other transactions made by
other people. The block where your transaction is listed will then be chained to previous blocks.
Cryptocurrencies use electronic coins as their form of exchange, which are nothing more than
slots in the blockchain.

6. Cryptocurrencies use cryptography, the process of protecting information by using codes, for
security. It is also used to control transactions and increase the supply. With this feature,
cryptocurrencies have become self-governing and self-regulating. It provides routine escrow
mechanisms that could easily be implemented to protect buyers.

7. However, having no intrinsic value, there are also significant risks associated
Howeryptocurrencies. Their worth comes from their users. The more users a coin has, the more
useful it becomes, and the higher its price goes Cryptocurrencies only serve to transfer wealth
from one party to another. But when a coin falls out of favor, there is nothing to stop it from
going to zero and that is the risk.

8. China has already developed a Central Bank-backed crypto, and in the US it was discussed as
part of the C-19 stimulus. In other words, unregulated cryptocurrencies will one day compete
against state-sponsored ones, too.

9. Decentralized cryptocoin markets run through a blockchain relying on a peer- to-peer protocol.
So trading altcoins is done through dozens or even hundreds of independent nodes and
masternodes. Transactions occur only when the nodes come to a consensus based on the
exchange’s verification rules.
 10. When it comes to cryptocurrency exchange websites, however, centralization remains a core
concept. Centralized exchanges are run by companies that manage and earn revenue from
transactions on the platform

2-1

LESSON SUMMARY

1. International trade theories are various theories that analyze and explain the patterns and
mechanisms of international trade, how countries exchange goods and services, and help
countries in deciding what should be exported and what should be imported, in what quantity,
and with whom trade should be done globally.

2. Trade is the concept of exchanging goods and services between two people or entities.

3. International trade is the exchange goods and services between people or entities in two
different countries.

4. International trade theories were initially company-based and were called classical theories.
Classical economists were oriented primarily toward growth economics, and their main concern
was to explain how the “wealth of nations” could be increased.

5. The main points of the classical theories of international trade are the following:

a. Trade is an important stimulator of economic growth.

b. Trade tends to promote greater international and domestic equality.

C. Trade helps countries to achieve development.

 c. In a world of free trade, international prices and costs of productions determine how
much a country should trade in order to maximize its national welfare.

d. In order to promote growth and development, self-reliance based on partial or complete

isolation is asserted to be economically inferior to participation in a world of free
unlimited trade.

6. In the mid-twentieth century, economists shifted from country-based to firm-based or company-

based theories, which were called modern theories. These theories are useful and can help with
international trade by helping a business determine the right country to expand into and make
goods more efficiently than other firms.

2-2

KEY TAKEAWAYS

1. The “Commercial Revolution” saw the transition from local economies to national economies,
from feudalism to capitalism, and from a rudimentary trade to a globally larger international
trade.

2. According to mercantilism, also known as “bullionism,” it is the goal of the economy politics to
ensure that the state is enriched by increasing the entry of gold and silver. Exports bring an
inflow of gold, whereas imports lead to the outflow of gold.

3. Countries employed a policy of protectionism; the country tried to protect the export industries
that brings in the gold and silver.

4. New nation-states practiced colonization where one country takes control of another country or
region. These nation-states expanded their wealth by using their colonies around the world in an
effort to control more trade and amass more wealth.
5. Entrepreneurship – The entrepreneur is the one that combines the factors in the correct
proportion and mobilizes them.

6. Capital goods – These consist of those goods which are produced by the economic system and
are used as inputs in the production of further goods and services.

7. Capital This refers to the money or funds used to purchase the goods used in the production
process.

8. Natural resources mines. These are found in nature, including land, trees, and

9. Labor This refers to the work performed by a person for a monetary consideration. It is the
monetary consideration that forms part of the cost of production.

10. In our modern times, the four factors of production are land, labor, capital, and
entrepreneurship.

11. Neo-mercantilism, therefore, combines protectionism through tariffs and import barriers and
domestic industry protection through subsidies and tax exemptions.

12. Free trade is when international trade is free from barriers, such tariffs, quotas, or other
restrictions, and can flourish on its natural growth free from government regulatory
intervention.

13. Free trade is a system that allowed for liberalization which would pave the way for a freely
initiated trade and engage the maximum possible number of people bringing benefits to most
parties and lead to further development of all participants in the long run.

14. Laissez-faire economics is a theory that restricts government intervention in the economy.
15. Specialization is a method of production whereby an entity focuses on the production of a
limited number of goods to gain a greater degree of efficiency that would lead to the
development of economies of scale.

16. Economies of scale occur when increasing output leads to lower long-run average costs. It means
that as firms increase in size, they become more efficient.

17. Jean-Baptiste Colbert was considered as a more profound influence on the development of
mercantilism in France, where it was known as “Colbertism.”

18. Sir William Petty posited that surplus gain is the fundamental originator of expanded
reproduction, which is conditional on capital accumulation.

19. Philipp Wilhelm von Hornick, in his Austria Over All, If She Only Will of 1684, detailed a nine-
point program of what he deemed effective national economy, which sums up the tenets of
mercantilism comprehensively.

20. Sir Thomas Mun wrote a pamphlet, A Discourse of Trade in England, where mercantilism was
called commercial system or mercantile system.

21. Antoine de Montchrétien published a book titled A Tract on Political Economy in which he laid
great emphasis on development of agriculture and described it as the basis of all wealth.

22. Richard Cantillon is considered by many to be the first economic theorist. He emphasized the
need of importing raw materials and exporting finished products to maintain a favorable balance
of trade.

23. Physiocrats is an eighteenth-century group of French economists who believed that agriculture
was the source of all wealth and that agricultural products should be highly priced.
 24. Giovanni Botero and Antonio Serra of Italy did not directly touch on mercantilism, but developed
theories using the city as a unit of analysis and finding development to be the result of
industrialization.

2-3

LESSON SUMMARY

Resources 1. Absolute advantage means a producer can produce a good or service better, faster, more
efficiently, at a greater volume, and with fewer others. It means that a producer can produce a good or
service at lesser marginal cost than other producers. If a country has more resources needed to produce
a good or service, it has absolute advantage over a country who does not have those resources. Than

2. Marginal cost is the cost incurred in producing an additional unit of a product.

3. Adam Smith is recognized as the founder of modern economics; hence, considered as the father of
economics. He is credited with using the word mercantilism first and that his book The Wealth of Nations
marked the birth of modern capitalism.

4. Capitalism, also called free market economy or free enterprise economy is an economic system, where
most means of production are privately owned and production is guided and income distributed largely
through the operation of markets, which determine prices, products, and services rather than the
government.

5. Modern capitalism emerged as a result of the appearance of the physiocrats in France. The physiocrats
were a group of economists who believed that the wealth of nations was derived solely from agriculture;
that only agriculture yielded a surplus.

7. Physiocracy is perhaps the first well-developed theory of economics. It immediately preceded

the first modern school, classical economics. The physiocrats believed that the wealth of a
nation lies not in its stocks of gold and silver, but rather in the size of its net product.
8. Net product, a measure of the income generated in a production process, is the value of outputs
minus the value of inputs.

9. Like the physiocrats, Smith recommended leaving economic decisions to the free play of self-
regulating market forces, with the state playing a highly limited role.

10. Smith did not believe that industry was unproductive and that only the agricultural sector was
capable of producing a surplus above the subsistence level. Smith saw that division of labor and
extension of markets created almos limitless possibilities for society to expand its wealth
through production and trade.

11. The theory of absolute advantage believes that countries should produce and export such
products which they have an absolute advantage on and import those goods that they produce
relatively less efficiently and at a higher cost.

12. Smith used the concept of absolute advantage to explain gains from free trade in the
international market. He upheld in this theory the necessity of free trade as the only sound
guarantee for progressive expansion of trade and increased prosperity of nations.

13. According to Smith, free trade promotes international division of labor through specialization in
the production and exchange of such commodities, in case of which they command some
absolute advantage. Specialization increases productivity through technical and organizational
innovations.

14. An interesting aspect of Smith’s analysis of trade has been his vent for surplus doctrine, which
advocates nations exchanging their overproduction for other goods which are in demand in
other countries. In addition, this doctrine implies that the foreign trade results in the fullest
utilization of the idle productive capacity that is likely to exist in the absence of trade.

15. Smith also mentioned an additional beneficial aspect of international trade- it transfers
knowledge and technology between different nations. The adoption and use of new production
techniques lead to productivity growth and, thus, to an increase in wealth and economic
development.
2-4

LESSON SUMMARY

1. Comparative advantage means a producer can produce a good or service at a lower opportunity
cost than others. If a country can produce goods or services at a lower cost than other countries,
it has comparative advantage. A country has comparative advantage when it produces a good or
service for a lower opportunity cost than other countries.

2. Opportunity cost is what is lost or missed out on when choosing one possibility over another.

3. While the theory of comparative advantage is attributed to Ricardo, Adam Smith was among the
first to put in writing the theory of comparative advantage.

4. For Smith, the specialization and division of labor, in the emerging large-scale industries of his
homeland England, provided the base for lowering labor costs, which ensured effective
competition across countries.

5. The extent of specialization and division of labor was dependent upon the size of the market. A
larger market would encourage a greater degree of specialization and division of labor; hence,
the development of international trade.

6. The classical theorists believe that each country will specialize in the production of those goods
for the production of which it is especially suited on account of its climate, of the qualities of its
soil, of its other natural resources, of the Innate and acquired capacities of its people, and of the
real capital which it possesses as a heritage from its past generation, such as buildings, plants
and equipment, and means of transport.

7. Industrial capitalism is an economic system in which trade, industry, and capital are privately
controlled and operated for profit. It saw the rapid development of the factory system of
production characterized by much more rigid, complex, and intricate division of labor that Smith
was propounding.
 8. Free trade, as opposed to the mercantilist policies of protection, was championed by both Smith
and Ricardo as a route to achieve production efficiency at a global level. Ricardo’s cost
calculations were based on labor hours, which were treated as a single homogeneous input.

9. It was comparative advantage which was considered both necessary to ensure mutually gainful
international trade across borders warranting complete specialization in the specific commodity
with a comparative advantage in terms of labor hours used per unit of output.

10. The theory of comparative advantage was formulated by David Ricardo when he investigated in
detail the advantages and alternative or relative opportunity in his 1817 book On the Principles
of Political Economy and Taxation in an example involving England and Portugal. He argued that
a country boosts its economic growth the most by focusing on the industry in which it has the
most substantial comparative advantage. According to his comparative advantage principle,
developing countries with a comparative advantage in agriculture should continue to specialize
in agriculture and import high-technology widgets from developed countries with a comparative
advantage in high technology.

11. David Ricardo started out as a successful stockbroker, making $100 million in today’s dollars.
After reading Adam Smith’s The Wealth of Nations, he became an economist. He pointed out
that significant increases in the money supply created inflation in England in 1809. Ricardo
developed the theory of monetarism, the theory or practice of controlling the supply of money
as the chief method of stabilizing the economy.

12. Ricardo also developed the law of diminishing marginal returns, which states that there is a point
in production where the increased output is no longer worth the additional input.

13. In older economic terms, comparative advantage has been opposed by mercantilism and
economic nationalism. They argue that while a country may initially be comparatively
disadvantaged in a given industry, countries should shelter and invest in industries until they
become globally competitive.

2-5
LESSON SUMMARY

1. David Ricardo’s theory of comparative advantage posits that countries export the goods they
have abundant production factors for, while they import the goods for which they have scarce
production factors. Relative intensities of production factors (land, labor, and capital) determine
the comparative advantage of a country.

2. Using the above premise as a starting point, two Swedish economists, Eli Heckscher and his
student Bertil Ohlin, from Stockholm School of Economics, in the 1920s, studied how a country
could gain comparative advantage by producing products that utilized factors that were in
abundance in the country.

3. The Heckscher-Ohlin theory or H-O theory is based on a country’s production factors-land, labor,
and capital; hence, the theory is also called the factor proportions theory or the resources and
trade theory. Hecksher and Ohlin determined that the cost of any factor or resource was a
function of supply and demand.

4. Many elaborations of the model were provided by Paul Samuelson after the 1930s and thus,
sometimes the model is referred to as the Heckscher-Ohlin- Samuelson (HOS) model.

5. In the 1950s and 1960s, some noteworthy extensions to the model were made by Jaroslav
Vanek, and so occasionally the model is called the Heckscher-Ohlin-Vanek model.