rJ

~
~
~
UNIT 1
~
~ :,Q .l) Distinguish between int
ernal and internati onal trade.

~
Internal Trade International Trade
two
(I) Trade between two or more (1) Trade between two or more than
tioo aJ
regions/cities within a country is countries is known as intema
trade.
~
known as internal trade. n of
(2) It is based on internal divisio
n of (2) It is based on international divisio

~
labor labour. . ~

(3) Same currency is used (3) Different currencies are •

_(4) Transport costs are relatively small. (4) Transport costs are relatively Jaree.
by
Internal trade is regulated by nat
ional (5) International trade is regulated
~
(5) ent
law and policies. different laws and policies of differ

~
countries.

~ plain the importance of international trade. [Nov 18]

=: ~
Q.2) Ex

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A2
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~ ;p )Q.3) Write a short note on: Gains from trade.

ul to trading countries. Various gains from trade are
~ ln. ternational trade takes place only because it gainf
~ 11sted below:

~ (I) lnternatio~al trade leads to territorial division of

labour and regional ·specialization in production. This
and lower cost of production (leading to lower
~ • le~ds to mcreased productivity, more production
pnces).
~ (2) International trade allows optimum utilisation of
resources of trading countries.
~ s which it cannot itself produce due to lack of
(3) Thro~gh international trade a country can get good
~ techmcal know-how or lack of natural resources or lack
of skills.

~ (4) International trade makes it possible for each tradi

ng country to have consumption of more varieties of
welfare of society.
~: :, goods and services for domestic citizens. This improves

~ (5) Trade promotes competition. In tum, competitio

n increases efficiency of domestic producers. This
results in increased productivity and better quality of
output.
~ (6) International trade leads to expansion of the size of
market, thereby leading to more and more complex
~ division of labour and improvement in productivity.
~ (7) International trade has become a vehicle for econ
omic development of underdeveloped and poor

~ countries of world.

~
lute cost advantage theory.
- - ; , Q.4) Critically evaluate Adam Smith's abso

~ Introduction:
~ Adam Smith was lhe fast classical economist to advocate lhe principle of absolute advantage as lhe
basis of
:
international trade. h is the presence of absolute cost differences
~ The main cause of trade according to Adam Smit n
efore every country should specialize in the productio
,■ betw _
een coun tries producing similar commodities. Ther
cheaply than others ~nd exchange it for the commod
ities that cost
~ of that commodity which it can produce more
~ less in ~ther countries.

t' Statement of Smith's theory -

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Assumptions of Smith's theory -

' 'I
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Illustration:

'
, Let there ~e two countri
Y resp ectively, at an
es,
abs
A
olute
and
low
B,
er
hav
cost
ing absolute differences in costs in producing a commodity
of production than the other. Following
table shows this:
each, X and

:, CommodityX Co mm odi tyY

Country 5
10
A 10
5
B
can produce 5 X
that country A can produc e 10 X or 5 Y with one unit of labour and country B
~ The table shows
or 10 Y with one unit of labour. ge in the production ofX (because 10 X of A
is greater than 5 X
ntry A has an absolute advanta than 5 Y of
~ In this case cou in the production ofY (because 10 Y ofB is greater
an absolute advanta ge
ofB ) and country B has
~ A).
tion before trade:
:, Following table summarizes produc
CommoditvX CommoditvY
J Countrv 5
10
A
~ 5 10
·B 15
15
~ Total Production
ize in commodity
country A sho uld specialize in commodity X and country B should special
j According to Sm ith e:
cialization is shown in the follo'Ying tabl
;, Y. The picture that emerges after spe

A5
, -
CommodityX CommodityY

'
~
~

-
~
Country
A
B
20
-
20
20
20
-
Total Production

'Before trade both countries produce only 15 units each

~each commodity. If A were to specialize in producin
of the two commodities by applying one labour unit
g commodity X and use both units of labour on it, its
larly, if B were to specialize in the production of
on
total
Y alone, its total
lroduction will be 20 units of. X. Simi .
production will be 20 units ofY
will exch ange X for Y. Assu ming term s of trade to be 1 X = 1 Y, the combined gain to both countries
~Now A n in the following table:
from trade will be 5 units of each of X and Y as show
~ ity¥
Country CommodityX Commod
~ A 10 -5
B -5 10
~ Gains 5 5

~Limitations/Criticisms of Smith's theory:

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Q 5) Critically evaluate David Ricardo's com
·
parative cost advantage theory.
[Nov 18, Oct 19, Jan 21]
e~

~
Introduction:
t e df
view ?fh i'.c1es
~ David Ricardo in the year 1815 form ulated the theory of com parative cost 1~ .
advantage · e 1c1en
.
ent in Smith's theory of absolute cost adva ntage in explaining the phenomenon of mtemahonal trade
.:) pres
orem:
..J Statement of Comparative Cost Advantage The
~

~ A6
:,
~

~
 t~
~3 Burma : l unit of cotton = 2 units ofrice
~
<r ,
Tenns of Trade: l unit ofcotton = 1 unit of
rice to 2 units of rice
;r
✓:.
of 1 unit of rice for
will lie between the two rates; the lower rate
~ '- The actu ~ tenn s of trade
will
at
be
any
for
part
Indi
icul
a;
ar
and
time
the high er rate of 2 units of rice for every unit of cott
on will be for
~ every WUt of cotton
tfr-i.:........ . , Burma. ed at 1.5 units of rice
al term s of trade between the two countries is establish
~ Suppose , afte r barg aining, the actu
will gain by 0.5 unit s of rice for every unit of cotton. This is a gain of 50 perc
ent.
a
Lirt::, l) for every unit of cott
d,
on.
Bur
Indi
ma gains by 0.5 unit s of rice for every unit of cotton. This is gain
of 25 percent. The
,~ On the othe r han
ual demand..
_T) actual terms of trade will depend upon mut

,c.: , -.a))
~> ) Limitations / Criticisms:

~
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~
~ Q.6) Cr itically evaluate Heckscher - Ohlin factor endowment theory of international
~ trade. [Oct 191

~ Co Uo11v·~
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A9
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A12
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~ ;;;(
;;::, Q. 7) Compare Heckscher - Ohlin factor endowment theory of internat
ional trade with the
. ,x classical theory. [ JJ f)-f;, :r Mp O?r f-eu,..-l-) ----------
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A51
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•
 Q.1) Write a note on Mill's theory of reciprocal demand.
Olt
Explain the gains from international trade and its distribution. [Nov 18)

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A13

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A14
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A15
t:
 Q. 2) Explain Marshall's theory of offer curves
. {Nov 18J
OR
ve? Explain the terms of trade with the help of offer curves. {Oct 191
What is offer cur
OR
ory of offer curves {J~n 211
Explain with diagram Marshall Edgeworth's the

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