Seven Arguments against Comparative Cost Theory

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The main arguments against the comparative cost theory regarding its applicability in underdeveloped countries are as follows:

(i) The underdeveloped countries export primary products and the world demand for these products is highly unstable in the short period. This makes their export earnings uncertain.

(ii) The world demand for primary products is not only unstable, but also is likely to be stagnant or declining in the long run. This is because of the low income elasticity of rich countries for primary goods. As income increases, people tend to spend smaller amount of their income on necessities.

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(iii) Factor prices in the underdeveloped countries are not the true indicators of their comparative cost. This is because of the imperfections in their factor markets.

(iv) Temporary protection to manufacturing industry during its early stage not only safeguards its growth from foreign competition but also enables it to enjoy the advantages of experience.

As the labour and management gain more and more experience in actual production, their efficiency increases, as a result of which, the cost decreases and the industry becomes, in the later stages, capable of resisting the foreign competition even without protection.

(v) Development of manufacturing industry stimulates activity in other sectors of the economy through the linkage effects. It, on the one hand, increases the demand for inputs from other sectors (backward linkage effect) and, on the other hand, supplies its output to other sectors which use it as input (forward linkage effect).

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(vi) The policy-makers in the underdeveloped countries have limited skill to anticipate correctly the changes in the trade conditions of the world market. This leads to the adoption of a policy favouring the diversification of economic structure of the country to enable it to meet the changing requirements of the world market.

(vii) From the experience of the colonial rule in these countries, it can be concluded that free trade between the developed and under developed countries on the basis of comparative cost difference has not only failed to be the engine of economic growth in the latter, but also has been responsible for the typical problems of the present-day underdeveloped countries.

Outside forces, in the form of foreign trade and colonial rule, uprooted the workers from traditional cottage industries, created conditions of population explosion (by providing better health facilities which reduced the death rate) and thus led to the present problem of disguised and open unemployment in these countries.

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