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

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International Business- Dr. R. Chandran
e.g., if wine is to be produced, grapes should be available all the times with
no price fluctuations. Obviously, this cannot be the case and the availability
of raw material (in this case grape) would affect the cost of the end product.
This aspect of the theory has been criticised as the comparative advantage
may only exist for a given range of production, sooner or later the law of
increasing costs will come in to operation and the advantage may turn in to a
disadvantage. Hence, countries do not specialize completely and
specialization also changes in many countries due to multifarious reasons.
The major limitations of the theory are as follows:
1. Theory of comparative advantage is based on the value of the labour.
It considers labour as the only factor of production and assumes that
all labour is homogeneous. However, labour does not alone produce
goods; there are other factors, such as availability of raw materials
that have been ignored. Further, labour units are not homogeneous as
there are different grades such as skilled, unskilled, semi skilled,
efficient, less efficient etc. hence the whole theory is unrealistic.
2. The assumption that labour is used in same fixed proportions in
production of both the goods in both the countries is too simplistic. In
fact, labour is used in varying conditions in producing different goods,
as some goods are more labour intensive than others, e.g., cotton
becomes yarn, yarn becomes grey; grey becomes fabric and fabric is
turned in to garments. It is difficult to verify the cost of labour at each
stage.
3. The theory assumes constant labour costs even output of goods
increases due to specialization under international trade. But in reality
the cost may either increase or decrease as a greater quantity of goods
are produced in the wake of trade. If costs decline with increased
production, comparative advantage will be larger and vice versa. The
theory does not takes in to account these changes in costs.
4. Ricardian theory is based on the assumption that factors of production
are mobile within the country but are immobile internationally. The
theory advocates uniform wages in a particular country. Practically,
however wages differ between one region and another in the same
country and between one industry and another within the same
country. Within the country, wages are very high in urban areas and
lower in the interior areas. In USA, India and Australia, local
transportation costs are than freight rates to neighbouring countries.
These costs are not considered in the Ricardian theory.
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