Q.34. Explain in detail the theory of
Comparative Costs.
INTRODUCTION
The classical theory of International
trade commonly known as the principle of comparative cost was first enunciated
by David Ricardo. The theory went through many additions improvements and
refinements at the hands of economists like Mill, Cairns & Bastable.
An individual is able to perform many
tasks but he does not perform them all. He selects that work which pays him the
most. A doctor can also do the work of a dispenser but he does not do it. The
same principle works in international trade. Considering the climatic
conditions, distribution of material resources, geographical concern etc. Every
country seems to be better suited for the production of certain articles rather
than for others to employ its resources more remuneratively it will be to the
advantages of
each country as well as to the world.
THEORY
In its simplest form the theory may
be stated as, ‘’It pays countries to specialize in the production of those
goods in which they possess the greatest comparative disadvantage.’’
EXPLANATION
Ricardo argued that two countries can
gain very well by trading even if one the countries is having an absolute
advantage in the production of both the commodities over the country. The
condition is ‘’Provided the extent of absolute advantage is different in the
two commodities in question’’ i.e. the comparative advantage is greater or
comparative is lessees in respect of one good than in that of the other. In
this connection we compare not the cost of production of one commodity with the
other rather we compare the ratio between the cost of production of the two
commodities concerned in one country with the ratio of their cost of production
in the other country.
EXAMPLE
Suppose there are two countries A and
B and there are two commodities wheat and rice. Suppose a unit of labour
produces 10 tons of wheat or 20 tons of rice in country A. The same unit can
produce 6 tons of wheat and 18 tons of rice in country B. According to this
situation country A is having an absolute advantage in the production of both
commodities over B. But she is at a greater comparative advantage in the
production of wheat country B is at a disadvantage in both. Commodities the
comparative disadvantage is less than case of rice. Hence the ratio would be
In A it is 10 : 20 i.e. 1 : 2
In B it is 06 : 18 i.e. 1 : 3
Therefore, A will specialize in wheat
and B in rice and international trade will become possible and profitable. This
is the law of comparative advantage or costs.
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