International Business Lecture No,21 By Dr.Shahzad Ansar

The Theory of comparative advantage The Principles of political economy by David Ricardo (1817)It says" potential world production is greater with unrestricted free trade than it is with restricted trade”

Qualifications & assumptions The above examples have following assumptions and qualifications like, 1-we have assumed only two countries with two goods while in real world this is not the case. There are many countries and many goods.

Qualifications & assumptions 2-We have assumed that there is no transportation cost between two countries. 3- we have assumed away price differences in resources, currency exchange rates, and compared cocoa and rice on one to one basis.

Qualifications & assumptions 4-Here we have assumed that resources can not move from one country to other and only restricted with in one country. While in real case resources like labor and finance can move internationally.

Qualifications & assumptions 5- We have assumed Constant return to scale, that is specialization by Ghana or Korea has no effect on amount of resources required to produce one ton of cocoa or rice, may these resources increase or decrease as a nation specializes in production of that good.

Qualifications & assumptions 6- we have assumed that each country has a fix stock of resources which does not changes with effect of efficiency with which a nation uses them. 7-We have assumed away the effect of trade on income distribution with in a country.

Trade & Economic Growth 1- Free trade may increase stock of resources as labor and capital from abroad.Like in eastern Europe's Countries. 2-Increase in country's stock and resources. 3-May gain economy of Scale

Heckscher- Ohlin Theory

The Leontief Paradox