Web Note 2.1: Wine and Cloth

Origins of a Theory
The principle of comparative advantage was developed by David Ricardo in 1817. You can find Ricardo's now-famous example — trading English cloth for Portuguese wine — in Chapter Seven of Principles of Political Economy. Use your 'Find in Page' function to look for "perfectly free commerce" in the Chapters 1-11 segment of the book.

Critics of an over-rigid adherence to the principle of comparative advantage also draw on Ricardo's example. They point out that this principle is static — that it depends on relative costs at a particular point in time and ignores the dynamic effects of different industries. In order to make cloth more efficiently, the English developed textile machinery. When it was no longer profitable for the English to export cloth, they could move on to export cloth-making machinery. Wine-making did not lead into other industries as easily.

Web Note 2.2: Wage Comparison

Some Data
Wages vary widely from country to country. The table, "Indexes of Hourly Compensation Costs" (Bureau of Labor Statistics), compares average wages in the manufacturing industries in a number of countries.

One difficulty that international comparisons of this sort present is that foreign exchange rates (how many Mexican pesos there are to a U.S. dollar, etc.) are not always indicative of the differences in purchasing power between those currencies. In its "Big Mac Index", The Economist compares currencies by using the McDonalds Big Mac as a standard of purchasing power. They have supplemented the burger index with a "Starbucks' tall-latte index". Wages in different countries can be compared by looking at the "Working time needed to buy a Big Mac."

Web Note 2.3: Minimum Wage

Superseding the Market
The minimum wage is another example of how a society adjusts for undesired market results. When we regard the market-set wage rate for unskilled labor to be too low, we legislate higher wage rates. In the United States, the Federal minimum wage sets an hourly wage floor for covered workers. States might expand on the Federal minimum by covering workers that are left out of the the Federal legislation and/or by legislating a minimum wage higher than the Federal standard.

A Minimum Wage Map
"Minimum Wage Laws in the States" looks at minimum wage rates state by state.

Inflation and the Minimum Wage
Changes in the Federal minimum wage must be voted on by Congress and are subject to veto by the President. Unlike Social Security payments, there is no automatic adjustment of the minimum wage rate to inflation. This chart tracks the changes in the purchasing power of the federal minimum wage. Two states, Alaska and Washington, automatically increase their minimum wages with inflation.