It may overstate the benefits of specialization by ignoring a number of costs. These costs include transport costs and any external costs associated with trade, such as air and sea pollution.

The theory also assumes that markets are perfectly competitive – in particular, there is perfect mobility of factors without any diminishing returns and with no transport costs. The reality is likely to be very different, with output from factor inputs subject to diminishing returns, and with transport costs. This will make the PPF for each country non-linear and bowed outwards. If this is the case, complete specialization might not generate the level of benefits that would be derived from linear PPFs. In other words, there is an increasing opportunity cost associated with increasing specialization. For example, it may be that the maximum output of cars produced by country A is only 20 million (compared with 30), and the maximum output of trucks produced by country B might only be 16 million instead of 21 million. Hence, the combined output from trade might only be 46 million units (instead of the 51 million units initially predicted).

Complete specialization might create structural unemployment as some workers cannot transfer from one sector to another.

Relative prices and exchange rates are not taken into account in the simple theory of comparative advantage. For example if the price of X rises relative to Y, the benefit of increasing output of X increases.

Comparative advantage is not a static concept – it may change over time. For example, nonrenewable resources can slowly run out, increasing the costs of production, and reducing the gains from trade. Countries can develop new advantages, such as Vietnam and coffee production. Despite having a long history of coffee production it is only in the last 30 years that it has become a global player. seeing its global market share increase from just 1% in 1985 to 20% in 2014, making it the world’s second largest producer.

Many countries strive for food security, meaning that even if they should specialize in non-food products, they still prefer to keep a minimum level of food production.

Q. Site a small instance pertaining to the situation?

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Solution The information provided in the question mainly pertains to certain additional opportunity cost of specialization in trade which are generall... View the full answer