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.

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

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.

            The  basic principle of comparative costs in now illustrated by using a simplified trade model where
i.                    There  are only two trading countries country A and B
ii.                 These two countries produce only two goods cotton and sugar
iii.               The commodities produced in each country are identical
iv.               There are no barriers to trade and no transport  costs.
v.                  Labor is the sole productive resources in the country and it can move freely from one industry to  another industry within the country.
Within the limits set by the model, we take three possibilities and examine wheel trade is profitable
i.                    Countries with absolute difference in cost of producing goods
ii.                 Countries with equal difference in cost of producing goods
iii.               Countries with comparative difference in cost of producing goods, international trade is profitable only under 1 and 3 countries but not under 2 as a explained below
Let us assume there are two countries, Pakistan and India Pakistan specializes in the production of sugar and India in wheat. Pakistan with X Labor cost produces 60 quintals of wheat or  30  quintals of sugar in a season,  as is shown in the table below.
Case 1 : absolute cost differences:
Cost ratio
Pakistan with x resources productions
30 quintals
60 quintals
India with x resources produces
60 Quintals
30 quintals
This  table shows that in Pakistan 30  quintals of wheat is equal in its exchange  value of  2  quintals of  sugar, the substitution ratio of the opportunity cost relation between wheat  and sugar is  1:2 in India, the  substitution ratio between wheat and sugar in  1:1/2  (on quintal of wheat is equal to ½  quintal of sugar).  From this table  it is clear that Pakistan has an absolute advantage in the production  of sugar and India in  the production of wheat, if Pakistan  specializes in the production of sugar and India in wheat, there  will be  increase in total output and  both the countries will gain from mutual  trade.
Pakistan will gain so long as it can receive more than one quintal of wheat by giving two quintals of sugar.  India will benefit from trade if she gets more than ½ quintal of sugar in exchange for one quintal of wheat.
If the opportunity cost ratio between two countries is equal, trade will not be advantageous  to any of them  for example, if Pakistan  with X labour cost produces  30  quintals of wheat or 60 quintals of sugar and India  will  the same given resources produces  26  quintals of wheat or  52  quintals of sugar, international  trade  will not take place between  them.

Cost ratio
Pakistan with x Resources
30 quintals
60 quintals
India with x Resources
28 quintals
52 quintals
            Trade is not gainful in both the countries because of the fact that in both Pakistan and India, one  quintal  of wheat can be exchanged for  2  quintals of sugar, Pakistan can benefit only if it gets more than  2  quintals of sugar in exchange for one quintal of wheat- India wilt not agree to  this  bargain because she  herself can exchange that much  quantity in her own  country.
According to Ricardo, if one country is more efficient than the other in the production of both the commodities,  international trade will be mutually profitable to them. The basic statement involves the principal of comparative cost which is explained with the help of an example. Let us suppose, Pakistan with x resources (labour) produces  10 quintals of wheat or  100  quintals of sugar  and India with the same x resources (labor) produces  5  quintals of wheat or  75  quintals of sugar.
Cost ratio
With x resources Pakistan produces
10 quintals
100 quintals
With x resource India produces
5 quintals
75 quintals
It is clear from the table,  above  that Pakistan has  comparative cost advantage in the production of both commodities, ie wheat and sugar . But  when we examine opportunity costs of  producing both  the  commodities  in two countries, the picture is then different. In  picture is then different. In  Pakistani the cost of one quintal of wheat is  equal to 10  quintals of sugar;  whereas in India the cost of one quintal of wheat is equal to 15  quintals of  sugar. Pakistan, thus, has a comparative advantage in the production of wheat and India in sugar, so if  Pakistan specializes in the production of whet and India in sugar, there will be greater output of both the  commodities, trade  will be beneficial to the trading countries.
As regards the rate of exchange, it is determined by the relative elasticity’s of demand of two countries for the , goods of the other, if Pakistanis demand for sugar in more intense than that of India for wheat, the  terms of trade will be more favorable to India and vice varsa.
The theory of comparative costs has been criticized on the following grounds.
i.        Unrealistic nature of the labor immobility assumption:  The theory assumes that labor is mobile  within the country but immobile between countries. This is not  realistic assumption. The migration of  labor from one country to another has an important  bearing on the traded goods.
ii.     Unrealistic assumptions of constant cost:  The assumption of zero transport cost and constant cost is also not valid. It does not accord with facts.
iii.   Unrealistic assumption of perfect competition: The theory assumes perfect competition. But in the actual world,  it is imperfect competition which  prevails.  The theory thus has no practical utility.
iv.   Labor differs in efficiency: The theory assumes that all labor is of the same quality. The fact however,  is that the efficiency of labor varies from person to person.
v.      Based on labor theory of value:  The theory of comparative cost was based in terms of labour theory of value, while in reality labor is only one element of total cost.

vi.         Restrictive Model:  Ricardo’s theory is based on only two countries  and only two commodities. But international trace is among many countries with many commodities.
vii.       Full Employment : The assumption of full employment helps the theory to exaplin trade on the basis of comparative advantage.  The  reality is far from full employment .  
viii.    Ignore Transport Cost: Another  serious defect is that the transport costs are not consider in determining comparative cost differences.
ix.         Static Theory:  The modern economy is dynamic and the comparative cost theory is based on the assumption sand static theory it assumes fixed quantity of resources if does not consider the effect of growth.    


The comparative cost theory is based on the following  assumptions: 
1.      Labour is regarded as the sole factor of production and the cost of  production only consists of labour cost. 
2.      Production is subject to the  law of constant returns
3.      Factors of production are assumed to the perfectly mobile within a country but immobile between  countries


1.      The two commodities two countries model can be extended  all  the commodities and all the countries. Each country then will specializes in the production of those commodities in which the enjoys  comparative advantage and export them to others and import the  required goods from others where they are available at  a  lower price  than at home.
2.      The theory which was explained in terms of labour can also be expressed in terms of money as it is possible to express the total coast in terms of money. Specialization would take place on the basis of comparative advantage in terms of money cost.
3.      The assumption of constant returns to scale and no change in technology can also be relaxed. With changes in technology and production being subject to laws of returns, specialization will still take place on the basis of cost advantage under increasing and decreasing cost.
4.      It is suggested that cost would not undergo a change as the countries operate with assumptions like full  employment perfect  competition, static nature of the economy , free trade and many of  her restrictive assumption.
The supporter of Ricordain theory argued that all the restricted assumptions of the comparative cost theory could be relaxed and make the theory practical in the real world situation where each country specializes in the production of these goods and services in which it has comparative cost advantage under the changing conditions.
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