THEORY OF COMPARATIVE COST ADVANTAGE David Ricardo presented

THEORY OF COMPARATIVE COST ADVANTAGE David Ricardo presented more precise formulation of theory of international trade called “Comparative cost theory”

THEORY OF COMPARATIVE COST ADVANTAGE. According to David Ricardo, it is not the absolute advantage, but the principle of comparative cost that determines the trade relations between the two countries.

THEORY OF COMPARATIVE COST ADVANTAGE. Thus A country will specialise in that line of production in which it has greater relative or comparative advantage in cost than other countries. And country will depend upon the imports of all such commodities in which it has relative cost disadvantage.

THEORY OF COMPARATIVE COST ADVANTAGE. Analysis of theory.

THEORY OF COMPARATIVE COST ADVANTAGE. Assumptions : The Ricardian comparative costs analysis is based upon following assumptions. 1. There are only two countries and two commodities. 2. Trade between two countries takes place on barter basis.

THEORY OF COMPARATIVE COST ADVANTAGE. Assumptions : 3. There is full employment of resources in both the countries 4. Labour is the only cost of production and cost of production is measured in terms of labour costs. 5. All labour units are homogeneous.

THEORY OF COMPARATIVE COST ADVANTAGE. 6. Labour is completely mobile within the country and completely immobile between the countries. 7. There are static conditions in the economy. i. e no changes in technology, taste and preferences etc. 8. Transport cost does not exists.

THEORY OF COMPARATIVE COST ADVANTAGE. 9. Perfect competition exists both in the commodity and factor markets. 10. There is no intervention by government in the economic system. the

THEORY OF COMPARATIVE COST ADVANTAGE. Labour cost of producing one unit (in days) products Country Wine Cloth Portugal 80 90 England 120 100

THEORY OF COMPARATIVE COST ADVANTAGE. Interpretation of table…………. .

THEORY OF COMPARATIVE COST ADVANTAGE. PPC.

THEORY OF COMPARATIVE COST ADVANTAGE. GAINS FROM TRADE:

THEORY OF COMPARATIVE COST ADVANTAGE. CRITICISMS OF THEORY. The theory of comparative cost has been vehemently criticised by modern economists like Bertil Ohlin, Heckscher, Heberler, Graham and others on the following grounds. 1. Two country-two commodity model is unrealistic 2. Labour is not only the factor of production. 3. Labour is not perfectly mobile 4. Ignores transport costs 5. Static nature of theory