Limitations of the comparative advantage theory

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.
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    Judith Nakato 7 months

    Thank for these elaborate points they have been helpful. Be Blessed Dr.

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