Reason (R) : Free movement of goods will correct the imbalance in the balance of payments of two countries.
In the context of the two statements, which one of the following is correct ?
Assertion (A) Analysis: Factor Costs and BOP Imbalances
The assertion states that according to Mundell, imbalances in the balance of payments are caused by initial differences in unit factor costs. This perspective is rooted in international trade theory, where cost differentials drive trade patterns and can lead to persistent trade surpluses or deficits. Variations in costs per unit of factor input affect a country's international competitiveness, making this a valid explanation for potential payment imbalances. Therefore, Assertion (A) is considered true.
Reason (R) Analysis: Free Trade and BOP Correction
The reason suggests that the free movement of goods will correct balance of payments imbalances between two countries. While free trade can contribute to the adjustment process by allowing market forces to operate, it is not universally sufficient to correct all imbalances. Various factors, including price stickiness, the Marshall-Lerner condition, capital flows, and policy interventions, influence the balance of payments. The Mundell-Fleming model, for instance, highlights the significant roles of exchange rate regimes and capital mobility in adjustment. Thus, the claim that free trade alone guarantees the correction of imbalances is an oversimplification and is considered false.
Conclusion: Evaluating Assertion and Reason
Based on the analysis of both statements:
- Assertion (A) is true.
- Reason (R) is false.
This outcome aligns with the understanding that while cost differences cause imbalances, free trade alone is not a guaranteed solution.
Important Questions from International Trade
Consider the following statements about the international financial sources :
I. A Global Depository Receipt (GDR) is a bank certificate issued in more than one country for shares in a foreign country.
II. A GDR is very similar to American Depository Receipt (ADR).
Select the correct option.
Which of the following documents is not required for obtaining export license?
_________ was set up with prime objective of professionalizing the country’s foreign trade management by providing training, research and data dissemination.
Which one of the following does not fall within the ambit of WTO operations ?
The following statements relate to Restrictive Trade Practices (RTP). Choose the correct code for the statements being correct or incorrect.
Statement I: Often the low price is the result of the predatory pricing strategy; prompting selling at prices below cost.
Statement II: This is done with an aim to drive out existing competitors because predatory pricing is a restrictive trade practice.
