1. The Theory of Comparative Cost and Under Developing Countries
Learning Objectives:
Application of the Theory
Theories of international trade applicable to UDC’s
I: The Productive Theory
II: The Vent for Surplus theory

2. Classical theory of comparative cost and UDCs
The theory of comparative cost is not applicable to underdeveloped countries. This is because,
Factors of production not fixed in quantity and quality.
Resources not fully utilized
Techniques of production not fixed
Disequilibrium in balance of payments
Gains from trade not to nationals

3. 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,
The productivity theory and
Vent for surplus theory

4. 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.

5. Benefits of Productivity Theory
By enlarging the size of market and scope of specialization productivity theory explain the different benefits,
Greater use of machinery
Encourage inventions
Raises of Labor productivity
Generate of high profit
Low cost of production
Economic development

6. 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.

7. 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:
To increase the export production
More utilization of unused national resources
More utilization of unused natural resources
Opportunities for reallocation of resources
End chapter