Limitations of absolute advantage theory absence of

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LIMITATIONS OF ABSOLUTE ADVANTAGE THEORYAbsence of absolute advantage: As according to the absolute advantage theory, one country has anabsolute advantage in producing one good while the other country has an absolute advantage inproducing another good. But, many developing countries are lacking behind in the area oftechnology therefore they are not able to compete in the global market in order to the production ofgoods, hence they are unable to benefit form the free trade market [Alf08]. More factors of production: In the real world, the production of goods are dependent of variousfactors, such as land, labour, capital and many other factors. Thus, the goods cannot be dividedaccording to their absolute advantage for a country in production basis. One country may requiremore of one input and simultaneously, less of another input than in another country. These otherfactors are analysed by the Hecksher- Ohlin model [Alf08]. Intra-versus Inter industry trade: According to the absolute advantage theory, there is an exchange ofone type of good with another type of good between two countries. But in today’s world manycountries do exchange similar types of goods also, such as cars etc. this type of trade is alsobecoming a trend in today’s world. It can be based on market power and economies of scale, asanalysed in new trade theory [Alf08].
LIMITATIONS OD COMPARATIVE ADVANTAGE THEORYFirstly, as according to the comparative advantage theory the assumption was wrong that the wagesbetween industries do not vary. The workers of retail industry are often paid less as compared to theworkers of construction and manufacturing industries. Although, workers of the same industries mayget the different wages in the different sectors of economy. For example, a secretory of amanufacturing company will be paid more than the secretory of an educational entity. So workersmoving from high wage sector jobs to low wage sector jobs are hurt if any economy specializes in thelatter [Alf08].Secondly, the nature and structure of specific commercial ventures might be such that theadvantages from exchange may gather just to not very many labourers though the greater part ofspecialists may really be more awful off in spite of total increases from exchange. The welfare resultsof exchange for the majority of the general population in such an economy will be negative [Alf08].Thirdly, the elasticity of demand is varies according to the goods. When any country is passingthrough the tough times, and global demand is decreasing. If the nation is specializing in producingjewellery, for instance, may find it difficult to trade its products to raise enough money to importfood. STANDARD MODELStandard model in the trade has a great influence of the opportunity costs of production. Theopportunity cost for ant Nation can be identified by the slope of the tangency at the autarkyequilibrium point. Let us, take an example of two Nations- Nation 1 and Nation 2. The slope of thetangent for Nation 2 is less therefore, the opportunity cost for the Nation 2 in production of good X isless as compared to the production of good Y. therefore, and Nation 2 has got the comparativeadvantage in producing good X [Dom11].

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