The Theory of Comparative Cost and Under Developing Countries Learning Objectives: Application of the Theory Theories of international trade applicable to UDC’s I: The Productive Theory II: The Vent for Surplus theory

Classical theory of comparative cost and UDCs The theory of comparative cost is not applicable to underdeveloped countries. This is because, Factors of production not fixed in quantity and quality. Resources not fully utilized Techniques of production not fixed Disequilibrium in balance of payments Gains from trade not to nationals

Theories of international trade applicable to UDCs Professor Myint points out the different assumptions in classical theory of comparative cost is not applicable to UDCs. Myint traces those neglected elements to Adam Smith theory and develops the, The productivity theory and Vent for surplus theory

The Productivity Theory The Productivity Theory: According to Smith, by expansion of the market, the international trade improve the division of labour which raises productivity with in trading country. But Productivity Theory points out indirect dynamic benefits.

Benefits of Productivity Theory By enlarging the size of market and scope of specialization productivity theory explain the different benefits, Greater use of machinery Encourage inventions Raises of Labor productivity Generate of high profit Low cost of production Economic development

The Vent for Surplus Theory Adam Smith in his Book “ Wealth of Nation” explain the advantages of foreign trade in term of the “ vent for Surplus” This theory states that in the absence of trade, there will be surplus productive capacity in the country. When foreign trade is started, it will not require any transfer of resources away from domestic production. Thus, there is a net gain from foreign trade.

Cont’d Myint has applied the Smith’s “ Vent for Surplus” theory to UDCs for measuring the effect of gains from international trade. The vent for surplus theory is highly appropriate for UDCs as compared with the comparative cost theory on the following counts: To increase the export production More utilization of unused national resources More utilization of unused natural resources Opportunities for reallocation of resources End chapter