Limitations of the Theory of Comparative Advantage (HL only)
Benefits of International Trade
Syllabus requirement
Assumptions such as full employment, constant opportunity cost, and no transport costs may not hold in real-world trade. Gains may also be unequally distributed.
Summary
This topic examines the limitations of Ricardo's theory of comparative advantage, which recommends that countries specialise in goods they can produce at lower opportunity costs and trade to increase overall welfare. The section explains why comparative advantage can change over time and lists real-world factors (factor endowments, technology, R&D, price stability, exchange rates, transport costs, trade barriers, and imperfect mobility or information) that make the theory less applicable in practice for HL students analysing gains from trade.
