COMPARATIVE COST THEORY:DAVID RICARDO

Each country specializes in that commodity in which its comparative cost is the least .Therefore when a country enters into trade it will export those commodity in which it’s comparative costs are less and will import those commodities in which comparative costs are high.It follows that each country will specialize in this commodity in which it has greatest advantage or the least comparative advantage.The assumptions of this theory are as follows.

1. There are two countries.
2. There are two commodities.
3. There is similar taste in both the countries.
4. Labour is the only factor.
5. The supply of labour is unchanged.
6. All units of labour are homogeneous
7. Price of the two commodities are determined by labour costs.
8. Commodities are reduced under the law of constant cost.
9. Technical knowledge is unchanged.
10. Factors of production are perfectly mobile within each country but are immobile between each country.
11. All the factors are fully employed.
12. There are no trade barriers.