Limitations of the comparative advantage theory
- Relying on comparative advantages can lead to depletion of countries’ resources.
- May promote unfair or poor working conditions elsewhere
- May lead to overdependence on other countries
- The theory assumes of only two countries, yet there are many countries in the world.
- It considers only labour costs, yet production involves many other costs such as power, raw materials and transport.
- It assume that countries only produce two commodities but countries trade in many goods and service
- It assumes that there no transport costs yet transport costs affects some advantages of specialization
- It assumes that exchange of goods and services are to be conducted under barter trade arrangements, yet modern trade requires money.
- The theory emphasizes specialization by the countries concerned and overlooks diversification which is currently encouraged
- Factors of production are not equally efficient in all economic activities e.g. labour cannot be shifted from cotton production efficiently to sugar production.
- The existence of the law of diminishing returns is ignored.
- It assumes that there is no government control of production and trade system and yet for economic and political reasons, the government interfere with international trade
- It assumes that the factor of production is always mobile by shifting labour from one producing unit to the other which is not realistic. There are restrictions/barriers to both geographical and occupational mobility between and among countries
- It assumes free trade across boundaries but international trade is limited with barriers like tariffs, foreign exchange control and quotas.
- It has little relevance in developing countries that produce similar goods making exchange impossible
- The law ignores the fact that two countries can incur the same costs in production of a particular commodity making it difficult for a country to identify a product specialize in.
- When a country has absolute cost advantage in production of the two commodities it may difficult to choose what to specialize in.
- Countries today are emphasizing need for self-reliance yet the theory emphasizes specialization and interdependency.
- The law assumes full employment of all resources, which is not always the case.
CATEGORIES Economics
TAGS Dr. Bbosa Science
Thank for these elaborate points they have been helpful. Be Blessed Dr.