Applicability of the Principle of Comparative Advantage 

Applicability of the Principle of Comparative Advantage

Note: To a lesser extent, the principle is applicable in developing countries and the following reasons are given to support that.

  • Developing countries have tended to specialise in agricultural production where they have least/lowest comparative cost
  • There are some barter trade arrangements in developing countries as assumed by the theory because of lack of adequate foreign exchange. 
  • There is some degree of mobility of factors of production within individual countries as assumed by the theory 
  • Developing countries mostly import manufactured goods where they have less comparative advantage.
  • There are some cases of free trade as assumed by the theory as a result of economic integration e.g. preferential trade area etc.
  • There is use of labour intensive techniques of production which is abundant and cheap for developing countries. This is because there is surplus labour 

Irrelevance/in applicability/limitations/criticism of the principle of comparative advantage

NOTE: The weakness of comparative advantage theory is that it is based on a number of assumptions that are not realistic.  

The principle of comparative advantage is inapplicable/irrelevant to a greater extent because of the following reasons:

  • It wrongly assumes only two countries involved in international trade. The reality is that world trade is multi-lateral involving many countries.
  • The assumption of only two commodities is unrealistic. There are more than two commodities produced in the two countries depending on demand for goods and service hence there is production of a wide variety of commodities.
  • It assumes barter trade as the only means of exchange which is wrong. But in reality in modern economies there is monetary exchange and barter trade is continuously dying out.
  • It assumes free trade yet in reality there are trade barriers. This is because trade is often subjected to barriers to discourage imports and exports which limit the volume of trade operations.
  • It does not consider possibility of changes in technology yet there is technological progress. Technological changes bring about changes in productive efficiency which helps to reduce costs of production of goods and increase their supply. 
  • It ignores transport costs which cause differences in costs of production and this is not true. This is because transport costs determine the pattern and profitability in international trade in developing countries. 
  • It wrongly assumes the possibility of full employment. In developing countries, there is underutilisation of resources which is reflected in excess capacity in production units due to low levels of technology, limited market, etc.
  • It ignores the possibility of international mobility of factors of production. There can be international mobility of factors of production but also factors of production are not perfectly mobile within a country as the theory assumes.
  • It assumes homogeneity of factors of production yet they are not equally efficient. This is because different units of factors of production possess different level of productivity and therefore they are different therefore not homogeneous. e.g. skilled ,semi skilled, and unskilled labour.
  • It assumes that demand is elastic yet the demand for agricultural products is inelastic. Hence LDCs don‟t benefit in international trade due to low prices offered.
  • It ignores the possibility of absolute cost advantage. It is possible for a country to produce both commodities more cheaply than the other which makes it difficult to determine the commodity in which either country should specialise.
  • It ignores possibility of change in comparative advantage over time yet it can change. It may change in favour or dis-favour of one commodity over the other overtime. e.g. a country may be good in production of a commodity but because of improvement in technology, it shifts to production of another  instead overtime.
  • It ignores the need for self reliance by countries. Countries try to avoid over specialisation and try to produce a wide variety of goods as much as possible to reduce reliance on other countries.
  • It ignores the existence of diminishing returns yet diminishing returns occur. Most developing countries are agro based economies and diminishing returns occur which reduces productivity or the level of output of the commodity where the country has a comparative advantage may reduce.
  • It makes poor countries poorer/poor terms of trade. Developing countries specialise in the production of primary products whose prices are always lower and ever falling compared to manufactured goods from MDCs, hence the theory perpetually commits developing countries to being poorer as producers of primary products leading to unfavourable terms of trade.
  • It ignores the existence of different currencies used. Yet currency differences between and among countries exist which affects costs of production.
  • There are no constant costs as assumed by the theory. There are economies and dis economies of scale due to specialisation in one commodity and this leads to varying average costs of production yet its ignored by the theory.
  • It assumes similar needs (tastes and preference) in the two countries which is not true. This is because different countries have different needs depending on age, religion, sex/gender, etc hence production of different goods and services.
  • It ignores equal costs of production/identical opportunity costs. Countries may have the same costs in the production of a certain commodity and it becomes hard to find which country should specialise in a particular commodity. 

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