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Application of the Theory of Comparative Cost Advantage

Although this theory was postulated under two country-two commodity assumptions, it could be applicable to certain countries of the world, especially, West Africa, because of the wide geographical spread.

Thus in Nigeria, because of its wide geographical area, one area could have a comparative cost advantage in the production of a commodity than another area. For example, groundnuts, soya-beans, tomatoes, and rice could be produced at comparatively lower cost in the Northern part of the country. On the other hand, cocoa, kolanuts, palm oil and kernel are produced at comparative lower cost in the South than in the North. Thus, it pays the north to specialise in groundnuts, tomatoes and beans production while the south specialises in cocoa, kolanuts and palm oil production after which exchange could take place. When this happens, the north and south will benefit more by having more of those commodities.

Limitations of Theory of Comparative Cost Advantage

The short comings of this theory are:

(i) Transport costs are important in determining the pattern of trade. Ricado’s neglect of this cost is critical because international trade involves the transportation of goods from one country to other. Therefore, the assumption that no transport cost exists is untenable.

(ii) It neglects the roles of technology, neglects trade restriction and unemployment, which are important factors in modern trade. International trades are prone to many obstacles which dampen the assumption of no trade restriction.

(iii) The assumption of two countries and two commodities is unrealistic, as there are many countries and many commodities in modern trade.

(iv) Assumption of identical cost curve for the participating countries is untenable. There are decreasing and increasing costs among countries involved in international trade.

(v) Labour is not used in fixed proportions in the production of commodities.

(vi) Factors of production may not be mobile internally, i.e. from one industry to another or from one region to another. Hence the assumption that there is mobility of factors of production may not be tenable all the time.

(vii) The major obstacle to international trade is the problem of foreign exchange. Thus countries engaged in trade have different national currencies, which create foreign exchange problems. Hence, the assumption of lack of currency problem is unrealistic.

(viii) The theory may work to benefit some developed countries more than developing countries. This is so because the prices of manufactured goods have been rising while the prices of agricultural products of the less developed countries have been falling.