The
theory of comparative cost was put forward by David Ricardo in 1817. The main purpose behind developing this theory was to advocate for mutual trade.
DEFINITION AND EXPLANATION
According
to Ricardo: he defined comparative
cost as a “nations should not waste their scarce resources on producing the commodities which
they can obtain from abroad at lesser cost. A
nation should divert its
resources only to the production of commodities in which they have greatest
relative efficiency and trade for those products which they cannot produce efficiently
EXAMPLE:
David Ricardo,
with the help of his comparative cost theory tried to illustrate that even if
Portugal could produce wine and cloth more cheaply(in terms of labor hours) than England, it will be beneficial or Portugal to specialize
in the production of wine, because she is comparatively more efficient in its production than cloth, so if
Portugal concentrates in the production of wine and England specializes in the production of cloth, trade will be mutually profitable
to them because they have now a large
supply of wine and cloth.
The
principle of comparative cost can be made clear by taking
a simple example from our very day life. Let us suppose, there is a very
successful barrister who at the
very same time is a very good typist
will it
be advantageous for the barrister to type all his legal documents
himself? The answer is no. The time
which he spends in typing his papers can be more profitable utilized in
the preparation and pleading of his
cases in courts.
For instance, if
he types all his legal documents he can
save $2000 per month. If he engages a typist and spends that time in the preparation cases, he can earn $4000
per month. It will thus be profitable
for the barrister to devote his time in the preparation of cases and pleading
them in court than doing any other work. In economic terminology,
we can say, that though the barrister has an advantage in both pleading his cases and typing of documents, yet he can earn more if
he devotes himself exclusively to the
occupation in which he has the greater comparative advantage, i.e in legal work. We can take many other examples like this to
clear the concept of comparative cost. For instance, it is advantageous for a doctor to employ a dispenser than to do the work of
dispensary himself is a better dispenser.
The principle of
comparative cost which we have applied to individual cases is now applied to regions and countries. It pays each country to specialize
in the production of those commodities in which it has the greater comparative
advantage or in which it suffers the least comparative disadvantage. In the
words of Jacob Viner:
“The theory of
comparative cost as applied to international
trade is therefore, that each country trend to
produce, not necessarily what it can produce more cheaply than an other
country, but those articles which it can produce at the greatest relative
advantage ie at the lowest comparative
cost. Each country will produce that article in the production of which its
superiority is more marked or its
inferiority least marked”
It may be
remembered here that when the products of one country exchange for that of
another, it is not the cost of production which we compare but the ratio between the cost of the production of the
commodities concerned.