3 DEC SS Q.49

Read the following passage carefully and answer the question that follows:
Under the labour theory of value. the value or price of a commodity depends exclusively on the amount of labour going into the production of the commodity. This implies that either labour is the only factor of production or labour is used in the same fixed proportion in the production of all commodities and that labour is homogeneous, i.e. of only one type. Since neither of these assumptions is true, we cannot base the explanation of the comparative advantage on the labour theory of values specifically. Labour is not the only factor of production, nor is it used in the same fixed proportion in the production of all commodities. For example, much more capital equipment per worker is required to produce some products, such as steel, than to produce other products such as textile. In addition. there is usually some possibility of substitution between labour, capital and other factors in the production of most commodities. Furthermore, labour is obviously homogeneous but varies greatly in training, productivity and wages. At the very least. we should allow for different productivities of labour. Indeed, this is how the Ricardian theory of comparative advantage has been tested empirically. In any event, the theory of comparative advantage need not be based on the labour theory of value but can be explained on the basis of the opportunity cost theory which is acceptable. To be noted is that Ricardo himself did not believe in the labour theory of value and used it only as a simple way to explain the law of comparative advantage. The law of comparative advantage is sometimes referred to as the law of comparative cost.