International-Business-Dr-R-Chandran-E-book

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International Business- Dr. R. Chandran
production of X by using all the available labour, which country B should
devote its labour for the production of commodity Y.
In China one unit of labour produce three soft toys per day, whereas, in
India, one unit of labour can produce only 1.5 soft toys per day, At the same
time one unit of labour in India cuts and polishes 10 carats of diamond a day
whereas in China it is possible to achieve only 6 six carats a day with the
same amount of labour.
In the above example the main factor is labour, In today’s era of
inventions and innovations, automation, outsourcing and cost reduction, and
mass production, the theory of absolute advantages does not have much
relevance.
The major drawback of the theory of absolute advantage is that it fails to
explain the fact that even less developed countries, which have no real
absolute advantage in any commodity are engaged in the export of goods.
The limitations and shortcomings of this theory are given below:
1. It has not advocated quality, premium and brand aspects of a product.
2. It has restricted itself only to considering the maximum to labour force.
3. It has failed to take into account the fact that many cost reduction
techniques are adopted in mass production.
4. There are many duties applicable when goods enter into other countries,
which have not been accounted for.
5. The nature of the commodity may incur huge transportation costs, which
may be even greater than the cost of the labour.
The theory of international trade, based on absolute cost difference is not
fully applicable in the current century, although it was an acceptable concept
during the period when industrialization was catching up in Europe during
the time of Adam Smith. Another theory, the theory of comparative cost
advantage was therefore evolved as the basis for international trade.
THE THEORY OF COMPARATIVE COST ADVANTAGE
It was David Ricardo, one of the prominent classical economists, who
propounded the theory of comparative cost advantage or the theory of
comparative advantage. He argued that it was the comparative difference in
cost that led to trade between two nations. According to him, each country
would specialize in the production of a commodity in which it has a
comparative advantage in cost. The country should export these
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