(a) State and explain the law of comparative cost advantage. [12 marks]

(b) Give two limitations of the law as a theory of international trade. [8 marks] 

gideonokhuevbie

3 years ago

Comparative Cost Advantage refers to the country’s capability to produce the specific good at lower marginal or production cost and opportunity cost compared to other countries.
LIMITATIONS OF THE COMPARATIVE (COST) ADVANTAGE
1. There are more than two countries in the world; the more the countries that are involved, the more complex and unworkable the principle will be.
2. There are more than two commodities in the world, many commodities make the principle impracticable.
3. We have other factors of production other than labour, like capital, land and entrepreneur.
4. All countries of the world can never have equal availability of labour.
5. It is impossible for all countries of the world to have equal efficiency of labour, not to talk of other factors of production.
6. It is impossible for free transport to exist between countries of the world.
7. Other obstacles of international trade will help to limit the effective functioning of the principle.
8. Trade imbalance between countries of the world will also militate against the effective functioning of the principle.
9. The cost of production in the world can never be constant.