Three myths regarding comparative advantage

 The three myths of this comparative advantage are

Myth1

A High wage country cannot afford free Trade with a low wage country. The high wage country will be undersold in everything. This myth is not true because labour is only one of the factors of production and constitutes input cost factor. The high wage country may have abundance of other inputs which are cheaper as a result of which the overall cost of the product may be low and price can be fixed at a competitive level.

Myth2                               

A low productivity country cannot afford free trade with a high productivity country. The former will be upstaged and decimated in industrial sector by the latter.

Again this myth cannot be totally true. In a way it says that a country, which has low productivity should close its borders to outside goods and produce everything by themselves, which is incorrect. Again high productivity is picturised as ‘absolute advantage’. Inspite of a country having a low productivity, it will have comparative advantage in some aspects and they can take advantage of the same.

Myth3

International trade decreases the total number of jobs in a country.

It is true that in some sectors there may be drop in employment on opening up the economy.  But there will be creation of employment in some sectors. As the international trade grows there will be a steady growth in employment. Moreover nowadays, even international organisations opt for employment of local labour for saving costs.

Thus all the three myths arising out of comparative advantage are incorrect.

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