Limitations of Ricardian Comparative Cost theory ↓
For considerable menses the theory of comparative costs formulated past times David Ricardo was the most acceptable explanation of the international trade. However, Ricardo's theory was subjected to publish of criticisms.
Following are the of import limitations of Ricardian Comparative Cost Theory.
1. Restrictive Model
Ricardo's Theory is based on exclusively 2 countries as well as exclusively 2 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 past times classical economists has besides many limitations as well as therefore is non applicable to the reality.
Value of goods as well as 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 work 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 unlike levels of work 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 provide of goods. Each province specialises inwards the production of the commodity based on its comparative advantage. The theory explains international merchandise inwards terms of provide as well as takes need for granted.
6. Mobility of element of production
As against the assumptions of perfect immobility betwixt the countries, nosotros witness difficulties inwards the mobility of labour as well as working capital alphabetic character inside a province itself. At the same fourth dimension their mobility betwixt nations was never totally absent.
7. No Free Trade
Ricardian theory assumes gratis merchandise i.e. no restriction on the motility 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 as well as non-tariff barriers on international trade. Poor countries notice it hard to taste the comparative wages inwards the production of labour intensive commodities due to the protectionist policies followed past times developed countries.
8. Complete specialisation
The comparative wages theory comes to decision of consummate specialisation. In the Ricardian example, England is specialising fully on stuff as well as Portugal on wine. Such consummate specialisation is unrealistic fifty-fifty inwards 2 countries as well as 2 commodities model. It is possible if 2 countries happens to survive or as well as so identical inwards size as well as 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 as well as the comparative cost theory is based on the assumptions of static theory. It assumes fixed quantity of resources. It does non reckon the lawsuit of growth.
10. Not applicable to developing countries
Ricardian theory is non applicable to developing countries every bit these countries are nowhere close to total employment. They are inwards the procedure of alter inwards lineament of their labour force, lineament of capital, technology, tapping of novel resources etc. In other words developing countries demo 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 as well as therefore constant cost of production inwards both the countries. The doctrine holds that if England specialises inwards cloth; in that location is no argue why it should attain wine. Similarly if Portugal has a comparative wages inwards producing wine, it volition non attain cloth; only import all stuff from England. If nosotros essay the blueprint of international merchandise inwards practice, nosotros notice it is non so. Influenza A virus subtype H5N1 fourth dimension volition come upwards when it volition non survive reasonable for Portugal to import stuff from England because of increasing cost of production. Moreover, inwards actual exercise a province produces a item commodity as well as also imports a business office of it. This phenomenon has non been explained past times the theory of comparative costs.
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