Practical Applicability Ricardian Theory of Comparative Cost

Applicability of Ricardian Theory in Real World ↓

Comparative cost theory inspite of all limitations has remained as a basic principle of international trade. Today when the world is moving towards greater liberalisation and globalisation each country specialises in production of goods and services on the basis of comparative cost advantage and enters into international trade.

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Prof. Gottfried Haberler, Frank William Taussig and others attempted to prove the practical importance and acceptability of comparative cost theory.

It is argued that :-

1. The two commodities two countries model can be extended to all the commodities and all the countries. Each country then will specialises in the production of those commodities in which it enjoys comparative advantage and export them to others and import the required goods from others where they are available at a lower price than at home.
2. The theory which was explained in terms of labour can also be expressed in terms of money as it is possible to express the total cost in terms of money. Specialisation would take place on the basis of comparative advantage in terms of money cost.
3. The assumption of constant returns to scale and no change in technology can also be relaxed. With changes in technology and production being subject to laws of returns, specialisation will still take place on the basis of cost advantage under increasing and decreasing cost.
4. Assumptions of "no transport cost" makes the comparative advantage theory, it is argued very unrealistic. It is pointed out that after adding transport cost to the cost of production, each country will produce those goods in which it will have cost advantage. After adding transport cost, for example, India may not enjoy the cost advantage against USA or Mexico but it certainly will have the advantage for selling them in the neighbouring countries.
5. It is suggested that cost would not undergo a change as the countries operate with assumptions like full employment, perfect competition, static nature of the economy, free trade and many other restrictive assumptions.

The supporter of Ricardian theory argued that all the restrictive assumptions of the comparative cost theory could be relaxed and make the theory practical in the real world situation where each country specialises in the production of those goods and services in which it has comparative cost advantage under the changing conditions.

The doctrine of comparative advantage inspite of its limitations, has remained as the basic principle of international trade. Today when the world is moving towards greater liberalisation and globalisation, each country specialises in the production of goods and services on the basis of comparative cost advantage and enters intc international trade. Each country attempts to lower its cost of production of internationally traded goods .to get an advantage in the global market. Therefore, it could be argued that Ricardian explanation of the basis of international trade is valid and applicable to the real world.

Conclusion ↓

On the basis of competitive cost advantage, countries can enter into international trade. Each country attempts to lower its cost of production of internationally traded goods to get in advantage in the global market.

So Ricardian explanation of basic of international trade is valid and applicable to the real world situation.

Articles On Ricardian Theory ↓

1. Ricardo's Theory of Comparative Advantage - International Trade.
2. Limitations of Ricardian Comparative Cost Theory.