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
The Net Barter terms of trade refer to:
A sudden shift from import tariffs to free trade may induce short‐term unemployment in:
The theory which explains the effect of devaluation on balance of trade is known as:
Which one of the following is not the disadvantage of international licensing?
Which one of the following factor does not influence the flow of FDI under Demand factors?
