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International Business

notes labour costs because of the prevailing belief in the labour theory of value. However, even
if the assumption of labour cost is discarded and cost differences are translated in terms of
money, the basic contents of the theory will still be valid.
2. Labor is not the only factor: Another objection against the comparative cost theory is that
it regards labour as the only factor of production. In the modern enterprise, factors like
‘capital’ and ‘entrepreneur’ assume greater importance as compared to labour. On this
account also, to restrict the cost of production only to labour cost is highly unrealistic and
makes the theory ineffective.
3. Assumption of constant cost not valid: The classical theory is based on the unrealistic
assumption of constant costs in real life. However, after a certain stage, every production
is subject to increasing costs or diminishing returns. Thus, additional quantities, beyond
this stage, can be produced only at a higher cost. As a result of this, with every increase
in production, the cost-ratios in the two countries may be so altered that they may finally
come to represent equal differences, rather than the comparative differences. The law of
increasing costs, thus, implies another limitation of the theory of comparative cost.
4. Too much emphasis on supply side: Prof. Ohlin criticizes the theory on account of its
complete neglect of the demand conditions. He regards the theory as “nothing more than
abbreviated account of the conditions of supply.” Because of their assumption of constant
costs, classical economist explained the cost difference on the basis of supply conditions
only. But, as we have seen above that costs do not remain constant; they do change with
changes in output, which in turn is influenced by the level of demand.
5. Static theory: The theory is static in the sense that it assumes so many things as given
and unalterable. Assumptions like ‘full employment’ and ‘fixed and constant supply of
factors of production’ are far from reality. In the real world, everything is changing and
changeable. The theory, therefore, does not fit into the dynamic nature of the present-day
world.
6. Assumption of perfect mobility of factors within a country and their perfect immobility
between the countries is not valid: Ohlin regards this assumption as dangerous and
misleading. If the factors are mobile within a country, then why are there differences in
wages in different occupations and differences in rates of interest in different regions? He
regards the classical doctrine of comparative costs as a clumsy tool of analysis. Ohlin rejects
the classical assumption of the immobility of factors of production between countries, as
the basis of international trade. For him, immobility of factors is not a special feature of
international trade, but is also prevalent within the different regions of the same country.
7. Assumption of perfect competition is unrealistic: Like other theories of classical economists,
the comparative cost theory is also based on the assumption of perfect competition but it
has been amply proved by modern economists that perfect competition exists nowhere.
What we actually have is some sort of imperfect competition.
8. Absence of transport costs: The theory assumes transport costs to be absent. Actually,
however, transport costs do make a difference in the direction and volume of international
trade. There are several branches of production in which transport costs are even higher
than production costs. A particular commodity cannot enter into international trade, unless
the difference in production costs between the two countries is higher than the costs of
transporting it from one country to another. Transport costs are, thus, too important to be
ignored. For example, sometime back Germany was one of the leading exporters of coal
and yet some of the near-by German ports found it more economical to import coal from
Britain. Here, comparative advantage was outweighed by transport costs.
9. Based on two countries – two commodities model: The theory has also been criticized on the
ground that it takes into consideration only two countries having only two commodities to
exchange. In actual practice, trade is multilateral, involving many countries. This, however,

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