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Urgent Solution From Suggestion-1-2 PDF
Urgent Solution From Suggestion-1-2 PDF
6. To assist international organizations such as, IMF and IBRD for establishing
coherence in Universal Economic Policy determination.
BENEFITS TO INDIA
The GATT secretariat estimated that largest increase in the level of merchandise
trade in goods (in general, it would be US $ 745 billion .by the end of 2005) will be in
the areas of clothing (60 per cent), agriculture, forestry and fishery products (20 per
cent) and processed food and beverages (19 per cent). India's competitive advantage
lies in these fields. Hence, it is logical to believe that India will obtain large gains in
these sectors.
India's textile and clothing exports will increase due to the phasing out of Multi-fibre
An'angement (MFA) by 2005 .
The reduction in agricultural subsidies and barriers to export of agricultural products,
agricultural exports from India will increase .
The multilateral rules and disciplines relating to anti-dumping, subsidies and
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countervailing measures, safeguards and disputes settlement machinery will ensure
greater security and predictability of international trade. This would be favourable
environment for India's international business .
India along with other developing countries has the market access to a number of
advanced countries due to the imposition of the clauses concerning to trade without
discrimination.
3. Enumerate the main effects of devaluation.
Answer: Effects of a devaluation
1. Exports cheaper. A devaluation of the exchange rate will make exports more
competitive and appear cheaper to foreigners. This will increase demand for exports.
Also, after a devaluation, UK assets become more attractive; for example a
devaluation in the Pound can make UK property appear cheaper to foreigners.
2. Imports more expensive. A devaluation means imports, such as petrol, food and
raw materials will become more expensive. This will reduce demand for imports. It
may also encourage British tourists to take a holiday in UK, rather than US – which
now appears more expensive.
3. Increased aggregate demand (AD). A devaluation could cause higher economic
growth. Part of AD is (X-M) therefore higher exports and lower imports should
increase AD (assuming demand is relatively elastic). In normal circumstances, higher
AD is likely to cause higher real GDP and inflation.
4. Inflation is likely to occur following a devaluation because:
5. Improvement in the current account. With exports more competitive and imports
more expensive, we should see higher exports and lower imports, which will reduce
the current account deficit. In 2016, the UK had a near record current account deficit,
so a devaluation is necessary to reduce the size of the deficit.
6. Wages. A devaluation in the Pound makes the UK less attractive for foreign
workers. For example, with fall in the value of the Pound, migrant workers from
Eastern Europe may prefer to work in Germany than the UK. In the UK food
manufacturing industry, more than 30% of workers are from the EU. UK firms may
have to push up wages to keep foreign labour. Similarly, it becomes more attractive
for British workers to get a job in the US, because a dollar wage will go further.
4. Explain the concept of comparative cost advantage theory of international trade.
How acounty will again from such trade?
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In this way, each country specialises in the production of that commodity in which its
comparative cost of production is the least. Therefore, when a country enters into
trade with some other country, it will export those commodities in which its
comparative production costs are less, and will import those commodities in which
its comparative production costs are high.
This is the basis of international trade, according to Ricardo. It follows that each
country will specialise in the production of those commodities in which it has greater
comparative advantage or least comparative disadvantage. Thus a country will
export those commodities in which its comparative advantage is the greatest, and
import those commodities in which its comparative disadvantage is the least.
(7) Prices of the two commodities are determined by labour cost, i.e.. the number of
labour-units employed to produce each.
(8) Commodities are produced under the law of constant costs or returns.
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(9) Trade between the two countries takes place on the basis of the barter system.
(11) Factors of production are perfectly mobile within each country but are perfectly
immobile between the two countries.
(12) There is free trade between the two countries, there being no trade barriers or
restrictions in the movement of commodities.
(13) No transport costs are involved in carrying trade between the two countries.
(14) All factors of production are fully employed in both the countries.
(15) The international market is perfect so that the exchange ratio for the two
commodities is the same.
Cost Differences:
There may be absolute differences in costs when one country produces a commodity
at an absolute lower cost of production than the other.
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Trade between the two countries will benefit both, as shown in Table 78.2.
Table 78.2 reveals that before trade both countries produce only 15 units arch of the
two commodities by applying one labour-unit on each commodity. If A were to
specialise in producing commodity X and use both units of labour on it, its total
production will be 20 units of X. Similarly, if В were to specialise in the production of
Y alone, its total production will be 20 units of Y. The combined gain to both
countries from trade will be 5 units of X and Y.
Figure 78.1 illustrates absolute differences in costs with the help of production
possibility curves. YA XA is the production possibility curve of country A which shows
that it can produce either OXA of commodity X or OYA of commodity Y. Similarly,
country В can produce OXB of commodity X or 0YB of commodity Y. The figure also
reveals that A has an absolute advantage in the production of commodity X (OXA>
OXB), and country В has an absolute advantage in the production of commodity
Y(OYB > OYA).
Adam Smith based his theory of international trade on absolute differences in costs
between two countries. But this basis of trade is not realistic because we find that
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there are many underdeveloped countries which do not possess absolute advantage
in the production of commodities, and yet they have trade relations with other
countries. Ricardo, therefore, emphasised comparative differences in costs.
Equal differences in cost arise when two commodities are produced in both
countries at the same cost difference. Suppose country A can produce 10 X or 5 Y
and country В can produce 8 X or 4 Y.
In this case, with one unit of labour country A can produce either 10 X or 5 Y, and the
cost ratio between A” and Y is 2:1. In country B, one unit of labour can produce
either 8X or 4Y, and the cost ratio between the two commodities is 2: 1.
Thus the cost of producing X in terms of Y is the same in both countries. This can be
expressed as
10X of A/ 8X of B = 5Y of A/4Yof B = 1
When cost differences are equal, no country stands to gain from trade. Hence
international trade is not possible.
Comparative differences in cost occur when one country has an absolute advantage
in the production of both commodities, but a comparative advantage in the
production of one commodity than in the other. The comparative cost differences
are illustrated in Table 78.3.
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In this case, country A has an absolute advantage in the production of both X and Y,
but a comparative advantage in the production of X. Country В is at an absolute
disadvantage in the production of both commodities but its least comparative
disadvantage is in the production of Y. This can be seen from the fact that before
trade the domestic cost ratio of X and Y in country A is 10: 10 (or 1:1), while in
country B, it is 6:8 (or 3:4). If they were to enter into trade, country A’s advantage
over country В in the production of commodity X is 10X of A / 6X of B or 5/3, and in
the production of Y, it is 10Y of A/8Y of B or 5/4. Since 5/3 is greater than 5/4, A’s
advantage is greater in the production of commodity X, A will find cheaper to import
commodity Y from country В in exchange for its X.
Since 4/5 is greater than 3/5, B has least comparative disadvantage in the production
of Y. It will trade its Y for X of country A.
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To show comparative advantage position in trade, draw a line RT parallel to line PQ.
Now country A has a comparative advantage in the production of commodity X only
because it exports ОТ (> OS) units relatively to country B. On the other hand,
country В has a comparative disadvantage in the production of commodity Y only.
This is because, if it gives up resources required to produce OS units of X, it would be
able to produce commodity Y by an amount less than OR. Thus country A has a
comparative advantage in the production of commodity X, and country В has a
comparative disadvantage in the production of commodity Y.
Its Criticisms:
The principle of comparative advantage has been the very basis of international
trade for over a century until after the First World War. Since then critics have been
able only to modify and amplify it. As rightly pointed out by Professor Samuelson, “If
theories, like girls, could win beauty contests, comparative advantage would
certainly rate high in that it is an elegantly logical structure.”
But the theory is not free from some defects. In particular, it has been criticised by
Bertin Ohlin and Frank D. Graham. We discuss some of the important criticisms as
under.
The most severe criticism of the comparative advantage doctrine is that it is based
on the labour theory of value. In calculating production costs, it takes only labour
costs and neglects non-labour costs involved in the production of commodities. This
is highly unrealistic be- cause it is money costs and not labour costs that are the basis
of national and international transactions of goods.
Further, the labour cost theory is based on the assumption of homogeneous labour.
This is again unrealistic because labour is heterogeneous—of different kinds and
grades, some specific or specialised, and other non-specific or general.
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The assumption of similar tastes is unrealistic because tastes differ with different
income brackets in a country. Moreover, they also change with the growth of an
economy and with the development of its trade relations with other countries.
The theory of comparative costs is based on the assumption that labour is used in
the same fixed proportions in the production of all commodities. This is essentially a
static analysis and hence unrealistic. As a matter of fact labour is used in varying
proportions in the production of commodities. For instance, less labour is used per
unit of capital in the production of steel than in the production of textiles. Moreover,
some substitution of labour for capital is always possible in production.
Adam Smith propounded the theory of absolute cost advantage as the basis of
foreign trade; under such circumstances an exchange of goods will take place only if
each of the two countries can produce one commodity at an absolutely lower
production cost than the other country.
Suppose, there are two countries I & II and two commodities A and B. For example,
country can produce a unit of commodity (A) with 10 and a unit of commodity (B)
with 20 labour units, and that in country II, the production of a unit of (A) costs 20
and a unit of (15) 10 labour units. Now country I has absolute cost advantage in tin-
production of (A) and it will confine itself to the production of (A) and country II in
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the production of (B). Exactly the same would happen if I and II were two regions of
one country. We speak of an absolute- differences in costs because each country can
produce one commodity at an absolutely lower cost them the other. Thus, in such a
situation, a division of labour between them must lead to an increase in total output.
Per Capita Income is first and most important indicators of economic development
of a nation. It is commonly used by all nations in the world along with UN while
measuring economic position of the nation. The PCI of Least Developed Countries
(LDCs) is less than $400. There are 49 countries LDCs across the globe.
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As a nation develops, poverty must be reduced and the gap between the rich and
poor must be narrowed down . Poverty limits opportunities of common people to
uplift their life. It weakens their income earning capability. Their access to health,
education and skill development is most essential to minimize poverty rate.
NEED FOR PLANNING:
n UDCs’ planning is necessitated due to following reasons:
Therefore, the State must come to the forefront action. The underdeveloped
countries have remained almost stationary.
This task of their development is a big task. These countries need a big push. It is
only possible through a comprehensive planning. Thus the Government should
follow comprehensive planning for the development of underdeveloped countries.
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particularly disguised unemployment, which exists in underdeveloped countries
cannot be dealt with unless a comprehensive economic plan for development is
formulated.
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Thus, the overall gains are maximized by making proper plan adjustments. Thus a
specified investment can be best utilized taking a macro-economic view to have
appropriate social as well as private gains. This strongly favours a planned
development specially in case of less developed countries.
In economics, the cycle of poverty is the "set of factors or events by which poverty,
once started, is likely to continue unless there is outside intervention".
The cycle of poverty has been defined as a phenomenon where poor families
become impoverished for at least three generations, i.e. for enough time that the
family includes no surviving ancestors who possess and can transmit the intellectual,
social, and cultural capital necessary to stay out of or change their impoverished
condition. In calculations of expected generation length and ancestor lifespan,
the lower median age of parents in these families is offset by the shorter lifespans in
many of these groups.
Such families have either limited or no resources. There are many disadvantages that
collectively work in a circular process making it virtually impossible for individuals to
break the cycle. This occurs when poor people do not have the resources necessary
to get out of poverty, such as financial capital, education, or connections. In other
words, impoverished individuals do not have access to economic and social
resources as a result of their poverty. This lack may increase their poverty. This could
mean that the poor remain poor throughout their lives. This cycle has also been
referred to as a "pattern" of behaviors and situations which cannot easily be
changed.
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