Limitations of Ricardian Comparative Cost theory ↓
For considerable menstruum 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 amidst many countries amongst many commodities.
2. Labour Theory of Value
Value of goods is expressed inward terms of labour content. Labour Theory of value developed past times classical economists has besides many limitations as well as hence is non applicable to the reality.
Value of goods as well as services inward the existent Blue Planet is expressed inward coin i.e. the prices are the values expressed inward units of money.
3. Full employment
The supposition of total work helps the theory to explicate merchandise on the ground of comparative advantage. The reality is far from total employment. Cost of production, fifty-fifty inward terms of labour, may alter equally 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 see inward determining comparative cost differences.
5. Demand is ignored
The Ricardian theory concentrates on the provide of goods. Each province specialises inward the production of the commodity based on its comparative advantage. The theory explains international merchandise inward terms of provide as well as takes need for granted.
6. Mobility of ingredient of production
As against the assumptions of perfect immobility betwixt the countries, nosotros witness difficulties inward 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 own got whatsoever restriction. what the existent Blue Planet witnesses is a lot tariff as well as non-tariff barriers on international trade. Poor countries notice it hard to bask the comparative wages inward 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 determination of consummate specialisation. In the Ricardian example, England is specialising fully on fabric as well as Portugal on wine. Such consummate specialisation is unrealistic fifty-fifty inward 2 countries as well as 2 commodities model. It is possible if 2 countries happens to survive nigh identical inward size as well as demand. Again, a consummate specialisation inward 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 see the lawsuit of growth.
10. Not applicable to developing countries
Ricardian theory is non applicable to developing countries equally these countries are nowhere nigh to total employment. They are inward the procedure of alter inward 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 as well as hence constant cost of production inward both the countries. The doctrine holds that if England specialises inward cloth; at that topographic point is no argue why it should compass wine. Similarly if Portugal has a comparative wages inward producing wine, it volition non compass cloth; only import all fabric from England. If nosotros essay the designing of international merchandise inward practice, nosotros notice it is non so. Influenza A virus subtype H5N1 fourth dimension volition come upwardly when it volition non survive reasonable for Portugal to import fabric from England because of increasing cost of production. Moreover, inward actual practise 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.
