Advantages & Limitations of Law of Comparative Cost Advantage

Advantages of Comparative Cost Advantage

1. It leads to an increase in the world production of goods.

2. It leads to a reduction in the prices of goods and services due to mass production.

3. There is an efficient utilization of resources.

4. Countries involved are able to earn more foreign exchange.

5. Countries involved are able to generate more revenue.

Limitation of Comparative Cost Theory

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. In the long run the law of diminishing return may set in, is only in the short run that comparative advantage favours.

3. Since there are more than two commodities in the world, these make the theory impossible.

4. The issue of transportation will reduce the advantage of comparative cost

5. In the area of trade, a restriction may affect the benefit that has been gained from comparative cost advantage.

6. The unrealistic assumption that labour is the major factor used in production whereby we have other factors of production like land, capital, etc. 

7. All countries of the world can never have equal availability of labour.

8. It is impossible for free transport to exist between two countries of the world.

9. The cost of production in the world can never be constant.