There is no room: The Role of Reciprocal Effectual Demands in Ricardo’s Theory of Foreign Trade

The purpose of this paper is to contribute to an interpretation of Ricardo’s theory of foreign trade following the lead of Sraffa’s own 1930 critique of Ricardo ́s alleged error and recently developed by other Sraffians. We argue that Ricardo assumed that trade happened at natural prices in each country. And once we take the process of gravitation towards those prices into account it follows that : (i) Ricardo’s theory is not incomplete, but fully determined so there is no need for price elastic demand functions, contrary to what John Stuart Mill argued; and (ii) in the simple cases of the examples of chapter 7 of Ricardo’s Principles, the terms of trade are determined by the ratio of the given actually traded levels of reciprocal effectual demands.

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