What assumption in Ricardo’s theory of comparative advantage makes it less applicable to modern global trade dynamics?

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BlackTom AI · Accepted Answer

Start by restating the question in my own words: we’re asked which assumption in Ricardo’s theory of comparative advantage limits its applicability to today’s global trade. Now evaluate each option one by one.
Option 1: It assumes full employment of resources across all trading nations. This assumption suggests that every country’s factors of production are fully utilized at all times. In the real world, unemployment and underemployment exist, business cycles cause idle capacity, and resource utilization fluctuates. This gap between the model’s full-employment premise and actual economic conditions could make the Ricardian framework less applicable to current dynamics.
Option 2: It assumes that capital is immobile across borders. Ricardo’s classic model emphasizes labor as the sole factor of production and typically does not incorporate capital or its movement in detail. If one were to interpret this as a specific, explicit assumption of the model, it would imply capital cannot move internationally, which is at odds with modern finance and investment flows where capital moves across borders to seek higher returns. However, many criticisms target the model’s lack of factor mobility broadly; the specificity that capital is immobile is not the central, explicit feature of the original Ricardian setup as it relates to comparative advantage.
Option 3: It ignores the impact of technological change on production efficiency. The Ricardian framework does involve technology differences between countries as the core driver of comparative advantage. Saying it ignores technological change would misstate the model, since technology differences are precisely what create comparative advantages in Ricardo’s analysis. Therefore this option mischaracterizes the model and is not a valid critique of its applicability.
Option 4: It overlooks the role of tariffs in correcting trade imbalances. While tariffs exist in modern trade and affect real outcomes, Ricardo’s model is a stylized, theory-based comparison of opportunity costs without policy instruments like tariffs. The model abstracts away from trade policy effects, so this critique—while relevant to policy discussions—focuses on a feature (tariffs) not central to the original comparative-advantage mechanism. Still, this omission is about policy instruments rather than the fundamental assumptions about resource use or technology, so it’s less about the core applicability to modern dynamics than a critique of policy realism.
In terms of which assumption most directly limits applicability to contemporary trade, the strongest case is made by the notion of full employment: real economies often operate with unemployment and slacks in capacity, which means the model’s core result—static allocation based on comparative advantage under full utilization—may not hold or be readily observable in practice. The other options, while pointing to tensions with reality (capital mobility, technology, policy tools), either misstate the model’s core setup or describe aspects that are not as central to Ricardo’s comparative-advantage mechanism. Thus, the most fitting critique centers on the full-employment assumption and its tension with actual macro conditions.

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What assumption in Ricardo’s theory of comparative advantage makes it less applicable to modern global trade dynamics?

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