The Theory of Comparative Cost and
Under Developing Countries
Learning Objectives:
1. Application of the Theory
2. 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,
1. Factors of production not fixed in quantity
and quality.
2. Resources not fully utilized
3. Techniques of production not fixed
4. Disequilibrium in balance of payments
5. 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,
1. The productivity theory and
2. 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,
1. Greater use of machinery
2. Encourage inventions
3. Raises of Labor productivity
4. Generate of high profit
5. Low cost of production
6. 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:
1. To increase the export production
2. More utilization of unused national resources
3. More utilization of unused natural resources
4. Opportunities for reallocation of resources
End chapter