Chapter 3 David Ricardo’s “On Foreign Trade”: The Original Idea Thomas Gerber and Rolf Weder Abstract In this chapter we lead the reader through some of the important pas- sages written by David Ricardo in the famous chapter “On Foreign Trade” in his book On the Principles of Political Economy and Taxation. We have a detailed look into Ricardo’s three paragraphs in which he developed the basis for international trade theory, using the numerical example of Portugal and England exchanging wine and cloth. Further aspects of his theory, his way of thinking and his method- ology are also discussed. We follow closely Ricardo’s own words and interpret different parts of his brilliant contribution. David Ricardo’s On the Principles of Political Economy and Taxation was published on the 19th April of 1817 (Ricardo, 1817). Note that the book includes a long list of totally 24 chapters most of which have general titles and thus signal that they aim at a discussion of fundamental issues. The first chapter is “On Value”, the second one “On Rent”, the fifth chapter “On Wages”, the sixth “On Profits”. Chapter VII then has the title “On Foreign Trade”, the original version of which is found in Chap. 20 of this book 200 Years of Ricardian Trade Theory. The title appears rather modest—which might be interpreted as “my preliminary thoughts on foreign trade”—and, with 30 pages in length, the chapter could be considered as mediocre. However, with respect to its contents, the chapter turns out to be grand—extraordinary. It is even more astonishing that Ricardo’s central argu- ment is almost entirely entailed in three paragraphs. Readers who are familiar with the Ricardian model of the “gains from trade”, typically encountered in introductory courses to (international) economics, 1 will be surprised that the buzzword “comparative advantage” is not even used one time in Ricardo’s Chapter VII. But, of course, the concept of comparative advantage is presented in an unequivocal manner. His presentation differs in some respect to T. Gerber (*) • R. Weder (*) Faculty of Business and Economics, University of Basel, Basel, Switzerland e-mail: thomas.gerber@unibas.ch; rolf.weder@unibas.ch 1 See, e.g., Caves, Frankel, and Jones (2007), Mankiw and Taylor (2014), Krugman, Obstfeld, and Melitz (2015). © Springer International Publishing AG 2017 R.W. Jones, R. Weder (eds.), 200 Years of Ricardian Trade Theory, https://doi.org/10.1007/978-3-319-60606-4_3 41