XII Banking - Question 35 - Theory of Comparative Advantage

Q.5. What are the assumptions and criticism relating to the theory of comparative advantage?




ASSUMPTIONS OF THE THEORY
The comparative cost theory is based on the following assumptions:

i. labour is regarded as the sole factor of production and the cost of production only consists of labour cost.

ii. Production is subject to the law of constant returns.

iii. Factors of production are assumed to the perfectly modile within a country but immobile between countries.


CRITICISM

The theory of comparative cost is criticized on the following grounds.


Assumption of Constant Cost

The classical economists were of the opinion that additional quantities & a commodity could be obtained with the same expenditure of cost per unit us previously But this is not valid assumptions lost ratios are subject to change where specialization between the two countries has gone a pace.


Some Static Assumptions

The comparative cost theory in a number of static assumptions of fixed costs industrial production functions between trading countries and fixed supply of land, labour, capital etc. It cannot be applied 100% to the real world.


Assumption of perfect mobility inside and immobility outside a country

This assumptions seems to be un-applicable to todays modern world of communication and technology the development of cheap quick and safe means of transport and communication has broken down this immobility to a great extent.