Limitations of the Theory of Comparative Advantage 

  1. Transport costs may outweigh any comparative advantage
  2. Increased specialisation may lead to diseconomies of scale
  3. Governments may restrict trade
  4. Comparative advantage measures static advantage but not any dynamic advantage for example in the future India could become good at producing books if it made the necessary investment

Terms Of Trade

This measures the price index of exports divided by the price index of imports. It is expressed as a percentage so in the base year it will be 100 .

For trade to be beneficial the terms of trade have to lie in between the different opportunity cost ratios


Page created by: Tejvan Pettinger,November 28, 2012