Question

Explain the theory of comparative advantage. How realistic are the assumptions of this theory? What are the implications for international trade of your results?

Answer 1

Theory of Comparative advantage:-

Theory of Comparative advantage is proposed by David Rocardo, it is also Theory of comparative cost advantage.

According to this theory if other things being equal or country tends to specialise and export those communities in the production of which it has maximum comparative advantage or minimum comparative disadvantage.

* If country specialise in all products it produce then to know comparative advantage it should compare opportunity cost.

*As per the theory a country should produce good at lower opportunity cost.

Example see the table image:-

2nd part:-There are certain assumptions:-

this theory assume that there are only two commodities two countries and one factor of production which is very complex for international trade.

this year assume a constant rate of return and therefore this theory actually ignore economy of scale.

This theory does not include the influence of technology.