Theories of international trade Questions Latest Theories of international trade MCQ Objective Questions GEE Ame oUt en Start Complete Exam Preparation Ceca a eon cl oats cca Question Benk peta Download App Question 1: View this Question Online > Atrange the following steps in the correct sequence of the internal trade process: A. Negotiation and finalization of terms B, Delivery of goods/services C. Placing an order D. Selection of supplier/manufacturer 1. CD-AB 2. D-A-C-B x” A D-CAB Answer (Detailed Solution Below) Option 2: D-A-C-Bcoaching India’s Super Teachers for all govt. exams Under One Roof EB) ooo case sist Theories of international trade Q: The correct answer is D-A-C-B. The correct sequence of steps in the internal trade process is as follows: D. Selection of supplier/manufacturer: In this step, the buyer selects a suitable supplier or manufacturer from whom they will procure the goods or services. A. Negotiation and finalization of terms: After selecting the supplier, the buyer negotiates the terms of the trade, including the price, quantity, delivery schedule, payment terms, etc. C. Placing an order: Once the terms are finalized, the buyer places an order with the supplier, confirming the purchase. B. Delivery of goods/services: In the final step, the supplier delivers the goods or provides the agreed-upon services to the buyer. Therefore, the correct sequence is D-A-C-B, which corresponds to option 2. ge Eee aera ariel Ree yore Start Complete Exam Preparation gary eee Rae pcre Cres eas Biter D> Download App Question 2: Match the following: Seay. Sear[a keuctas |, [IMF's unit of account and a potential claim on] _, [Special Drawing Rights (SDRs) larticle 1V |Consultations xe? 1 2-A, 3-D, 4-B . 1-B, 2-D, 3-A, 4-C 3. 1-D,2-C 3-8, 4-A 4. 1-A,2-B, 3-C,4-D Answer (Detailed Solution Below) Option 1: 1-C, 2-4, 3-D, 4-B Theories of international trade Question 2 Detailed Solution The correct answer is 1-C, 2-A, 3-D, 4-B. © Key Points The correct match is: Quotas (0) are the financial contributions each IMF member country makes. They are calculated based on the country’s economic size and determine the country's voting power and access to financing, Special Drawing Rights (SDRs) (A) are an international reserve asset, created by the IMF. It is not a currency but a potential claim on the freely usable curren health of its member countries. These consultations are a way to identify potential v policy issues, of IMF members. oO Article IV Consultations (D) are the IMF's regular reviews of the economic policies and econo Ne iti and that the program will solve the country's economic proble Conditionality (8) refers to the policies and measures which the IMF requir ies asa condition for financial assistance. The aim is to ensure that the a le to repay the IMF, ICT NIicTH EC 2|_[Quotas ancial contributions from the member countries, determining their voting power in the IMF and their access to financing. Special IMF's unit of account and a potential claim on the Ip [Drawing ireely usable currencies of IMF members. Rights (SDRs) article IV Regular reviews conducted by the IMF to monitor cl. conllthe economic health of member countries. onsultationg Policies that borrowing countries must follow to LsIconditionatit}. Obtain IMF financing and to ensure that the IMF's onditionali n esources are repaid. Hence, the correct answer is 1-C, 2-A, 3-D, 4-B. cd erase) Start Complete Exam Preparation estes ie Crests Download App lites hea Question 3: View this Question Online > Given below are two statements: Naa ities RCE Sot ‘Statement |: Translation exposure refers to the exchange gain or loss occurring from the difference in the exchange rate at the beginning and the end of the accounting period. Statement Il: Transaction exposure refers to the change in the value of the firm caused by the unexpected changes in the exchange rate. In the light of the above statements, choose the most appropriate answer from the options given below: 1, Both Statement | and Statement Il are correct. ao Statement I and Statement II are incorrect.3. Statement | is correct but Statement Il is incorrect. 4. Statement | is incorrect but Statement II is correct. Answer (Detailed Solution Below) Option 3 : Statement | is correct but Statement Il is incorrect. Theories of international trade Question 3 Detailed Solution The correct answer is Statement | is correct but Statement Il is incorrect. © Key Points ‘Statement I: Translation exposure refers to the exchange gain or loss occurring from the difference in the exchange rate at the beginning and the end of the accounting period Statement | accurately defines translation exposure, which is the exchange gain or loss resulting from the difference in exchange rates between the beginning and end of an accounting period. Translation exposure arises when 2 company's financial statements are converted from one currency to another, Statement Il: Transaction exposure refers to the change in the value of the frm caused by the unexpected changes in the exchange rate. gut J Statement Il, however, is incorrect. Transaction exposure réfers to the tisk of value changes in the firm's contractual cash flows due to unexpected changes in exchange rates. It is not specifically related to the overall value of the firm, but rather to the impact on specific transactions or cash flows. af Therefore, Statement | is true, but = lis false. §. Additional Information + Translation exposure refers to the risk faced by a company due to fluctuations in exchange rates when its financial statements are translated from one currency to another. It arises when a company operates in multiple countries and consolidates its financial statements to report them in a single currency, typically the reporting currency of the parent company. During the translation process, if there are changes in exchange rates between the beginning and end of the accounting period, it can result in exchange gains or losses. This occurs because the assets, liabilities, revenues, and expenses of the foreign subsidiaries are converted into the reporting currency using different exchange rates. The difference in these rates leads to translation gains or losses, which affect the reported financial results of the company. Transaction exposure, on the other hand, refers to the risk faced by a company due to unexpected changes in exchange rates that can impact specific transactions or cash flows. It arises from the company's day-to-day operational activities involving cross-border transactions, such as importing/exporting goods, borrowing/lending in foreign currencies, or entering into foreign currency contracts. Fd India’s #1 Learning Platform Rein CDeCtc Start Complete Exam PreparationTre easy Doerr Crested Download App Question 4: View this Question Online > According to the Heckscher-Ohlin theory, which one of the following statements is correct? 1. Trade should take place among countries that have greater differences in their factor endowments. eM Vy 2. Acountry with a relatively cheaper cost of labour would export labour-intensive products. 4, a> 3. Country benefits from international trade even if it is less efficient than other nations. A... with the proximity of geographical locations would have greater trade compared to the distant ones. Answer (Detailed Solution Below) Option 1: Trade should take place among countries that have greater differences in their factor endowments. Theories of international trade Question 4 Detailed Solution The correct answer is Trade should take place among countries that have greater differences in their factor endowments. © Key Points Heckscher-Ohlin Theory: According to the Heckscher-Ohlin theory, trade should take place among countries that have greater differences in their factor endowments. The theory suggests that countries will specialize in and export goods that intensively use their abundant factors of production, while importing goods that require factors that are relatively scarce ‘The Heckscher-Ohlin theory Is based on the following key assumptions: + Differences in Factor Endowments: Countries differ in their endowments of factors of production, such as labor, capital, and land. Some countries may have abundant labor butscarce capital, while others may have abundant capital but scarce labor. + Factor Intensity in Production: Different goods require different factors of production in varying proportions. For example, labor-intensive goods require a larger share of labor compared to capital-intensive' goods that require more capital. Based on these assumptions, the theory suggests the following: + Comparative Advantage: Countries will specialize in producing and exporting goods that utilize their abundant factors of production. For example, a labor-abundant country will specialize in labor-intensive goods and export them. + Factor Price Equalization: Trade in goods based on factor endowments will lead to an equalization of factor prices between countries over time. Countries with abundant factors will experience an increase in the price of their cbundant factor, while countries with scarce factors will see a decrease in the price of their scarce factor. + Factor Movements: The theory also suggests that factor movements, such as labor migration or capital flows, can occur to equalize factor prices and take advantage of comparative advantages in different countries. Hence, The correct answer is Trade should take place among countries that have greater differences in their factor endowments. ree geen ariel OR eee eee Start Complete Exam Preparation curate ea Download App Question 5: View this Question Online > International trade brings developing countries in contact with 1. Developed nations 2. underdeveloped nations 3. A... nations 4. All of the Above Answer (Detailed Solution Below) Option 3: low developed nations .Theories of international trade Question 5 Detailed Solution The correct answer is Low developed nations. ite Beletc International Trade: + International trade can indeed bring devéléping countries in contact with less developed nations. + In fact, one of the main benefits of international trade is that it can create opportunities for developing countries tgyagcess new markets, expand their economies, and improve the standard of living i + International trade allows developing countries to specialize in the production of goods and services in which they have a comparative advantage, while importing goods and services that are more efficiently produced by other countries. * This can lead to lower costs and increased efficiency, allowing developing countries to become more competitive and expand their markets. + Furthermore, international trade can facilitate the transfer of technology, knowledge, and skills, from more developed countries to developing countries. + This can help developing countries to upgrade their production methods, improve their productivity, and create new industries. Sea oly Reem ta Start Complete Exam Preparation ca] guy (ie) rectics (os] Ne ars bead co cao etic Download App Question 6 View this Question Online > Factor conditions in Michael Porter's competitive advantage of Nations include 1. Market size 2. Demand conditions 3. Internationally competitive suppliers 4. Skilled labour and scientific knowledge”Answer (Det: om Ww) ono Ses labour and scientific knowledge ‘Theories of international trade Question 6 Detailed Solution The Correct answer is Skilled labour and scientific knowledge @ Key Points The Competitive Advantage Of Nations by Michael Porter: + The Competitive Advantage of Nations is an economics book written by American author Michael E. Porter, a Harvard Business School professor and expert in corporate competitive strategy whose work is regularly quoted in business and economics. + For Porter, the concept of national productivity is not a meaningful term because countries don’t compete like businesses do. > important Points A four-factor system is used in Porter's Diamond model to forecast or evaluate cluster activities: 1. Firm Strategy, Structure, and Rivalry: A company’s structure and business strategy must align with the local business dimate in order for it to grow. Direct rivalry with other businesses should encourage each company to use its skills and resources to boost innovation and productivity—and to outperform its local competitors. 2. Demand Conditions: When customers in a local market expect high-quality, differentiated products, companies trying to meet those demands will be obliged to innovate in order to survive. As a result, a company that succeeds in a competitive and aggressively demanding local market will also succeed in the global market since its products have been fine-tuned. re) 3. Related and Supporting Indust All organizations rely on suppliers for parts, raw materials, and information exchange CG and most companies engage in this cycle as both customers and providers. Whe} supply chain firms are productive, high-quality enterprises local and global market, the company's efficiency, producti prove as well 4, Factor Conditions: Factor conditions in Michael Porter's competitive advantage of Nations include Skilled labour and scientific knowledge. This is a country’s situation in terms of production elements such as knowledge and infrastructure. These are important considerations in determining industry competitiveness. Material resources, people resources (labour expenses, credentials, and dedication), knowledge resources, and infrastructure are all elements to consider.K & India's #1 Learning Platform PRE Se laee Ce Cell Practice (on) Mock Tests Crests Ee Question 7 View this Question Online > The theory suggesting that the patterns of international trade are determined by factor endowment rather than productivity was propounded by which one of the following? 1. Adam Smith 2. David Ricardo 3. Heckscher and Bertil Ohlin 4. Michael Porter Answer (Detailed Solution Below) Option 3 : Heckscher and Bertil Ohlin Theories of international trade Question 7 Detailed Solution sWeperatetenaseeeregesirather than productivity was propounded by Heckscher and Bertil Ohlin. CPxey-Points Explanation: 1, Heckscher-Ohlin theory, in economics, a theory of comparative advantage in intemational trade, according to which countries in which capital is relatively plentiful and labour relatively scarce will tend to export capital-intensive products and import labour-intensive products, while countries in which labour is relatively plentiful and capital relatively scarce will tend to export labor-intensive products and import capital-intensive products. 2. The theory was developed by the Swedish economist Bertil Ohlin (1899-1979) on the basis of 3. For his work on the theory) was awarded the Nobel Prize for Economics (the Sveriges work by his teacher the S\ ‘h economist Eli Filip Heckscher (1879-1952). Riksbank Prize in Economi ‘es in Memory of Alfred Nobel) in 1977. ~ %\ Important Point 1, Heckscher and Bertil Ohlin theorem - according to which trade should originate among nations that have different factor endowments. 2. Adam Smith has given Absolute advantage theory. 3, David Ricardo - comparative advantage 4, Michael porter - porter's national competitive advantage od ieee aerate Scam Ce acne Reem Teron Tie Vay Poca etic) Download App Question 8 View this Question Online > Which one of the following is not the assumption of Theory of Absolute and Comparative advantage? 1. Countries are driven only by maximization of production and consumption 2. Only two countries are engaged in the production and consumption of just two goods 3. There are transportation costs for shipping goods from one country to anotherth s in converting the raw materials into finished 4, Labour is the only factor of pro: products on the are transportation costs for shipping goods from one country to another \cories of international trade Question 8 Detailed Solution The correct answer is There are transportation costs for shipping goods from one country to another. © Key Points + International trade refers to the process of exchanging goods/ services across the international territories. + There are various theories of international Trade, such as: Mercantilism Theory, Absolute Cost Advantage Theory, Comparative Cost Advantage Theory etc. + Mercantilism Theory: This theory is based on the idea that, it is gold and silver which reflects the national wealth of a country. It emphasize on self sufficiency concept through a favourable balance of trade by exporting more goods for accumulating gold and silver. » Important Points + Absolute Advantage Theory: This theory was propounded by Adam Smith in 1776. As per the principle of absolute advantage, each nation always has a distinct edge over another in the production of some specific good/ service. + Assumptions of Absolute Advantage theory are: > There are just two ations producing just two goods. > When one has completely cheap cost of producing one good, the trade will occur. + Labour cost becomes the base for calculating the cost of commodity. + There are no taxes, 2 There is no transportation cost for shipping products from one country to another country. + Comparative Advantage Theory: This theory of international trade was developed by David Ricardo in 1817.The ability of a party to produce a certain commodity or service at a lower % marginal and opportunity cost than another is known as comparative advantage. + Assumptions of Comparative Advantage theory are: Oo © There are just two nations producing two goods. G * There is absence of transportation cost. @ » Labour is the only factor of production. MA + Countries are driven by maximization of the production and ¢: . ©; Additional Information S The Theory of Absolute and Comparative .ge, developed by economists Adam Smith and David Ricardo, is based on certain key assu ® These assumptions include: Full employment: The theory assumes that all resources within an economy are fully employed,meaning there is no unemployment or underutilization of resources. Fixed resources: It assumes that the quantities of labor, capital, and other factors of production available within an economy are fixed and do not change during the period of analysis. ‘Two countries, two goods: The theory simplifies the analysis by considering only two countries and two goods being produced. This allows for a clear comparison of production capabilities and advantages between the two countries. Constant costs: The theory assumes that the costs of production, such as labor and materials, remain constant regardless of the quantities produced. This assumption allows for a simplified analysis of comparative advantage. No transportation costs or trade barriers: It assumes that there are no transportation costs or trade barriers between countries, meaning goods can be freely traded without any additional costs or restrictions. Hence, the correct answer is There are transportation costs for shipping goods from one country to another. & India's #1 Learning Platform eo ce Plame elm eel) PO Ped Neraned ad Cees pores Question Bank Download App ‘Question 9 View this Question Online > Match List | with List II List! List Il Authors of Trade Theory Name of Theory A. | Steffan Linder Product Life Cycle Theory8. | Raymond Vernon C.] Hecksher-Ohlin dvantage Theon| D.| Adam Smith .| Factor Proportion Theory cn answer from the options given below: x A-W,B-Ill,C-1,D-1 2. A-I,B-1,C-IV,D-IIl 3. A-1,B-IILC-IV,D-Il 4. A-Il, B-1,C-1,D-1V Answer (Detailed Solution Below) Option 2: A- 1, B-1,C- IV, D-Ill Theories of international trade Question 9 Detailed Solution Oo Key-Points Authior Trade Name of Theory Theory+ He developed the Country Similarity Theory in 1961 as he tried to explain the intra-industry la. stefan, trade ; Kinder | * He proposed that consumers in " countries that are in a similar stage , of development would have similar’ ie y preferences. o% + Product Life Cycle Theory was propounded by Raymond Vernon in 1986. . + This theory explains the various ~a stages a product goes through \ IB. Raynond after it enters the market. ernon} + It explains the reasons that determine all the stages ie. introduction, growth, maturity, and decline, and how these stages determine foreign exchange. « Factor Proportion Theory was developed by two Swedish economists, Eli Hecksher and his student Bertil Ohlin in the 1920s. IC. Heckphere This theory states that a nation JOhlin must specialize in the production and export of that product that makes use of its relatively abundant factor. + Absolute Advantage Theory was introduced by Adam Smith in 1776 in the context of international trade, using labor as the only input. ID. Adar This theory states that when a ISmith producer can produce a good or service in greater quantity at the same cost or at a lower cost, than other producers. Therefore, it is clear from the above explanation that option 2) is the correct answer. & erratic eet Slam Ce Cel)se SL Ses Question 10 View this Question Online > The theory of reciprocal demand in the field of international trade is propounded by: 1. Mill MA 3. Marshall 4. Ricardo Answer (Detailed Solution Below) Option 1: Mill Theories of international trade Question 10 Detailed Solution The correct answer is Mill Theory of Reciprocal Demand and Terms of Trade é + J.S. Mill's theory of reciprocal demand explains how trade takes place. + It states that a comparative difference in cost ratios sets the limits within which participating countries can import and export goods and commodities. + This theory was derived from the Ricardian theory of comparative advantage. + Mill's theory states —_ country should import or export which was not explained by Ricardo. ©; Additional Information Ricardian theory of comparative advantage + This theory states that countries will benefit from trade even if one country has an absolute advantage + As under absolute advantage, a country specializes in producing and exporting the goods and services for which it has a lower comparative opportunity cost. + Theory states that trade is driven by differences in labor productivity and the cost of productionro CEE ABUL helen) ORR Sees Start Complete Exam Preparation fey ieee Cresta pitta Download App Question 11 View this Question Online > (A) : International trade along the lines of comparative advantage improves the allocative efficiency of existing resources. {R) : international trade is an engine of growth. 1. Both (A) and (R) are true and (R) is the correct explanation of (A). 2. Both (A) and (R) are true, but (R) is not the correct explanation of (A). 3. (A) is true, but (R) is false. ’ AX... but (R) is true. Answor (Detailod Solution Bolow) Option 2: Both (A) and (R) are true, but (R) is not the correct explanation of (A). Theories of international trade Question 11 Detailed Solution The correct answer is Both (A) and (R) are true, but (R) is not the correct explanation of (A). » Important Points (A) : International trade along the lines of comparative advantage improves the allocative efficiency of existing resources. + The economic theory of comparative advantage was created by British economist David icardo in the 19th century. + A comparative advantage occurs when a country can produce a good or service at a lower opportunity cost than another country. + The theory of comparative advantage demonstrates that trade can still be advantageous to. both trading partners even when one country has an absolute advantage in producing goods. + Since, by using comparative advantage, both the countries can make the best use of their reanertive resources, it imnroves the allocdiaeaatiledty of evicting resources+ Hence, (A) is true. (R): International trade is an engine of growth. + International Trade encourag@gjgyowth and improves economic welfare by encouraging the more effective use of differei ns’ resource endowments for factors of production and enabling individuals to buy co ities from reliable sources of supply. + Trade also makes available to people goods which cannot be produced in their country due to. various reasons. + International trade growth can be a foundation for economic growth and poverty reduction, but it must be inclusive and consistent with sustainable development + Hence, (R) is true. (R) is not the correct explanation of (A) because Reason does not specify why comparative advantage theory improves the allocative efficiency of existing resources. (R) only considers international trade as fuel for growth. Hence, the correct answer is Both (A) and (R) are true, but (R) is not the correct explanation of (A). Pie aM ely: Balen ay Start Complete Exam Preparation ORCC iar coat reo Doce Download App Question 12 View this Question Online > Match List I with List I List| List I “apply side of 5 International}. Pavid rade [Demand side of| |Bastable and international I. Alfred Trade MarshallOpportunity 2. A-V,B-1,C-1,D-Ill 3. A-|B-IV,C-IILD-Il 4. A-WV,B-1,C-Ill,D-I Answer (Detailed Solution Below) Option 3: A-1,B-IV,C-Ill, D-IL Theories of international trade Question 12 Detailed Solution The correct answer is A - |, B- IV, C- Ill, D- I eo The correct match is given below: List | List Il ‘Supply side of linternational avid Ricard: hl ffrade [Demand side of fredeee —— Bastable and » Important Points Supply-side economics + Supply-side economics holds that increasing the supply of goods translates to economic growth for a country. + In supply-side fiscal policy, practitioners often focus on cutting taxes, lowering borrowing rates, and deregulating industries to foster increased production. Demand side Economics: + Demand-side economics hold that demand for goods and services drives economic growth. + Supply-side economics (also known as classical economic theory) states that the production of goods and services is the main force driving economic growth. Opportunity cost: * With the help of this theory, Haberler tries to explain the theory of comparative advantage of international trade on the basis ofopportunity cost. + In Haberler's words, "the marginal cost of a given quantity (x) of a commodity, say, A must be regarded as the quantity of commodity, say, B must be forgone in order that X, instead of (X-1) units of A can be produced. The exchange ratio on the market between A and B must equal their costs in this sense of the terms.” + According to the opportunity cost theory, the cost of a commodity is the amount of a second commodity that must be given up to release just enough resources to produce ‘one additional unit of the fixed commodity & India's #1 Learning Platform Rear cs Start Complete Exam Preparation rie fess’ Mock Tests pote Crested pittaDownload App Question 13 View this Question Online > Match List I with List II: List I (International ust Trade Theories) [David Ricardo |, [Theory of absolute (1817) ladvantage 8) Michael Porter A Factor endowment a A (®)\c1990) I") Itheory ‘h [Theory of [Theoryof Heckscher (1919) |- Ohlin (1933) a \ 2. (A) - (UD, (B) - (IV), (© - (, (D) - 3. (A) - (IV), (B) - (AN), () - ), ©) - 4. (A) - (ill), (B) - (IV), (C) - (W), ©) - Answer (Detailed Solution Below) Option 2 : (A) - (HII), (B) - (IV), (© - @, (D) - Theories of international trade Question 13 Detailed Solution The correct answer is (A) - (Ill), (B) - (IV), (C) - (I), (D) - (Il) List 1 List Il (International Trade Theories) David Ricardo [een ot pajes17) (nu \dvantage. Michael Porter [Theory of Ve¥r1900) |, competitiveA heory of absolute dam Smith (1776) [duontage ‘a Aiea °)-\anJeactor endowment theory Important Points Theory of absolute advantage by Adam Smith (1776): + Adam Smith argued that trade should be based on absolute advantage. + This term describes the position when one country is absolutely more efficient at producing _ good A, whilst another country is absolutely ‘better’ at producing good B. a + Both countries would benefit if they specialised in producing the goods at which they have the aTheory of comparative advantagedvantage and then exchanged their products. _ Theory of comparative advantage by David Ricardo (1817): + Smith’s argument about absolute advantage wes refined and developed by David Ricardo in 1817. + Ricardo, improving upon Adam Smith's exp developed the theory of international trade based on what is known as the Principle of Cal ative Advantage (Cost). + Asa person specialises in the trade in which he has best advantages, a country also specialises in the production of the commodity in which it has the best natural advantages. + A country may produce many things at a time, but it may have comparative advantages in the production of some commodities (say, tea or jute as in India) over others, and it will specialise in those goods. Factor endowment theory by Heckscher (1919) - Ohlin (1933): + The Heckscher-Ohlin (HO) model is a more accurate representation of the global economy following WWI. + Heckscher-Ohlin theory is an economics theory of comparative advantage in international trade that states that Countries with abundant capital and scarce labour will tend to export capital-intensive products and import labor-intensive products, while countries with abundant labour and scarce capital will tend to export labor-intensive products and import capital-intensive products. Theory of competitive advantage by Michael Porter (1990): + According to Porter's idea of competitive advantage, if you have a true competitive edge over your competitors, you can operate at a lower cost, command a higher price, or do both. It's more difficult to figure out how to gain an advantage. + Every organization's purpose is to produce items or services whose value surpasses the sum of all input expenses. + Thus, the ideal indicator, according to Porter, is Return on Invested Capital (ROIC). + ROIC will be consistently higher than the industry average if you have a genuine competitive advantage é fee “Ee Start Complete Exam Preparation eared cans ere aa Gees en escortD Download App Question 14 View this Question Online > Theory of international trade promotes A. Increase in demand for exportable products B. Rise in prices and volumes C. Improvement in quality of products D. Reduction in prices and increase in quality for consumers Choose the correct answer from the options given below: 1. Aand Bonly 2. A. Band Conly 3. A, Cand D only % A 4. B, Cand D only. Answer (Detailed Solution Below) Option 1: Aand B only Theories of international trade Question 14 Detailed Solution © Key Points International Trade is the exchange of goods and services across international borders. It usually comes with additional risks caused by changes in exchange rates, government policies, laws, judicial systems and financial market. » Important Points Theory of international trade promotes: + Increase in demand for exportable products as it was believed in Mereantilism that government should promote exports and that governments should control economic activity and place restrictions on imports if needed to ensure an export surplus i.e. country should increase gold by promoting exports and discouraging imports. + Rise in prices and volumes as both the production and per-capital income increases which result in economic prosperity.Thus, the correct answer is A and B only. ®; Additional Information + Economists have developed theories to explain the mechanisms of global trade. + The main historical theories are called classical or traditional and are from the perspective of a country, or country based. By the mid-twentieth century, the theories began to shift to explain trade from a firm, rather than a country, perspective. + These theories are referred to as modern and are firm-based or company-based. Both of these categories, classical and modern, consist of several international theories. Mercantilism Absolute advantage Traditional theories Comparative advantage Factor endownment theory Country ~a similarity theory Product life cycle theary Modern theories New trade theory National advantage theory A Mistake Points + The theory of international trade promotes an increase in demand for exportable products. + This theory suggests that countries should specialize in producing goods and services that they can produce more efficiently or at a lower opportunity cost compared to other countries. + By doing so, countries can benefit from trade by exporting their specialized products and importing goods that other countries produce more efficiently. OPE Seer parol OR ec Da oat Selim rch Lelypeer ‘Question 15 View this Question Online > Which of the following international Trade theories, the ‘Leontief Paradox’ pertains to 1. Comparative Advantage theory 2. Product life cycle theory 3. Heckscher-Ohlin theory off 4, Absolute Advantage theory Solution B3Iow), Answer (Detail Option 3: Heckscher-Ohlin theory 2 ‘aa international trade Question 15 Detailed Solution Leontief paradox: + Leontief paradox model was given by Wassily W Leontief in the year 1953. He suggested that the United States had an abundance of capital and the country should export more capital-intensive goods. + Although, he noticed that the data showed that the United States was importing capital- intensive goods. + Keeping in mind Heckscher-Ohlin's theory US should have imported labor-intensive goods instead of capital-intensive goods. His analysis was called Leontief paradox as his theory was the opposite of Heckscher-Ohlin’ theory. ©; Additional Information The international trade theory of the Leontief paradox pertains to Heckscher-Ohlin’s theory. 1. Heckscher-Ohlin theory: + Heckscher-Ohlin’s theory states that If a country has an abundance in labor, then the country should specialize in labor-intensive goods which would form a part of the export basket. + In the same way, the country should import capital-intensive goods from those countrieswhich have an abundance of capital. * According to the H-O model trade takes place in a manner that is gainful to both the countries with important effects upon wages, rent and prices (factor prices) + Itis a 2-2-2 Model, which takes two factors, two countries, and two commodities into account. » Important Points « Comparative Advantage theory: co + Comparative advantage theory states a country/firm can produce a servic jood at a lower opportunity cost than any other country. + This theory was given by David Ricardo in the year 1817 + It is a 2-2-1 model which takes two commodities, two account. + Comparative advantage can occur when a country 5 ge t exports commodities that ¢ country should specialize in have minimum disadvantage and maximum ‘0 other countries. doing what it can do relatively better whe Absolute advantage theory: + The theory states the ability of a country to produce more of 2 good or a service than its competitors using the same number of resources. The absolute advantage theory was given by Adam Smith in the year 1776, in the international trade considering labor as the only input. + The theory focuses on the ability of an individual/ country to produce more of a good/ service at a cost that is lower than any other nation. + For example, country X can produce a good faster or at a lower cost than country Z, then country X has an advantage in producing the good and the country can specialize in the production of the good. Product life cycle theory: + This theory is developed by Raymond Vernon in the year 1960. + The theory suggested that the life cycle of a product has three main stages: 1, New product (introduction) 2. Maturity of the product 3, Standardized product + The theory assumed that the new product's production will take place in the home country of its innovation.