Limitations of Ricardian Comparative Cost theory ↓
For considerable menstruation the theory of comparative costs formulated yesteryear David Ricardo was the most acceptable explanation of the international trade. However, Ricardo's theory was subjected to number of criticisms.
Following are the of import limitations of Ricardian Comparative Cost Theory.
1. Restrictive Model
Ricardo's Theory is based on solely ii countries in addition to solely ii commodities. But international merchandise is amid many countries amongst many commodities.
2. Labour Theory of Value
Value of goods is expressed inwards terms of labour content. Labour Theory of value developed yesteryear classical economists has besides many limitations in addition to therefore is non applicable to the reality.
Value of goods in addition to services inwards the existent ground is expressed inwards coin i.e. the prices are the values expressed inwards units of money.
3. Full employment
The supposition of total occupation helps the theory to explicate merchandise on the footing of comparative advantage. The reality is far from total employment. Cost of production, fifty-fifty inwards terms of labour, may alter every bit the countries, at dissimilar levels of occupation displace towards total employment.
4. Ignore carry cost
Another serious defect is that the carry costs are non reckon inwards determining comparative cost differences.
5. Demand is ignored
The Ricardian theory concentrates on the render of goods. Each province specialises inwards the production of the commodity based on its comparative advantage. The theory explains international merchandise inwards terms of render in addition to takes need for granted.
6. Mobility of component division of production
As against the assumptions of perfect immobility betwixt the countries, nosotros witness difficulties inwards the mobility of labour in addition to upper-case missive of the alphabet inside a province itself. At the same fourth dimension their mobility betwixt nations was never totally absent.
7. No Free Trade
Ricardian theory assumes gratuitous merchandise i.e. no restriction on the movement of goods betwixt the countries. Though it is unrealistic to assume non to direct maintain whatever restriction. what the existent ground witnesses is a lot tariff in addition to non-tariff barriers on international trade. Poor countries detect it hard to relish the comparative payoff inwards the production of labour intensive commodities due to the protectionist policies followed yesteryear developed countries.
8. Complete specialisation
The comparative payoff theory comes to determination of consummate specialisation. In the Ricardian example, England is specialising fully on stuff in addition to Portugal on wine. Such consummate specialisation is unrealistic fifty-fifty inwards ii countries in addition to ii commodities model. It is possible if ii countries happens to last most identical inwards size in addition to demand. Again, a consummate specialisation inwards the production of less of import commodity is non possible due to insufficient need for it.
9. Static Theory
The modern economic scheme is dynamic in addition to the comparative cost theory is based on the assumptions of static theory. It assumes fixed quantity of resources. It does non reckon the number of growth.
10. Not applicable to developing countries
Ricardian theory is non applicable to developing countries every bit these countries are nowhere nigh to total employment. They are inwards the procedure of alter inwards character of their labour force, character of capital, technology, tapping of novel resources etc. In other words developing countries present all the characteristics of dynamic economy.
11. Constant Returns to Scale
Another drawback of the Ricardian regulation of comparative costs is that assumes constant Returns to scale in addition to therefore constant cost of production inwards both the countries. The doctrine holds that if England specialises inwards cloth; at that spot is no argue why it should attain wine. Similarly if Portugal has a comparative payoff inwards producing wine, it volition non attain cloth; merely import all stuff from England. If nosotros bear witness the designing of international merchandise inwards practice, nosotros detect it is non so. Influenza A virus subtype H5N1 fourth dimension volition come upwards when it volition non last reasonable for Portugal to import stuff from England because of increasing cost of production. Moreover, inwards actual practise a province produces a detail commodity in addition to also imports a purpose of it. This phenomenon has non been explained yesteryear the theory of comparative costs.
