Reason (R) : Comparative cost theory is based on fixed supplies of factors of production.
Analyzing Comparative Cost Theory's Static Nature
This section evaluates the assertion that the Comparative Cost Theory is static and the reason provided.
Assertion (A) Analysis: Static Character
The Assertion (A) states that the Comparative Cost Theory is static. This is generally considered correct because the classical theory, particularly the model developed by David Ricardo, makes several simplifying assumptions that do not account for changes over time:
- Fixed technology: Assumes production methods remain constant.
- Fixed factor supplies: The amounts of land, labor, and capital are assumed to be fixed.
- No changes in tastes or demand: Consumer preferences are static.
- Perfect factor mobility within countries, immobility between countries.
Because these elements are assumed not to change, the pattern of comparative advantage and trade predicted by the theory remains fixed, hence its static character.
Reason (R) Analysis: Fixed Factor Supplies
The Reason (R) states that the theory is based on fixed supplies of factors of production. This is also correct. The concept of comparative advantage hinges on differences in opportunity costs between countries. These opportunity costs are derived from the relative productivities of factors (like labor) in producing different goods, given the fixed amounts and proportions of factors available within each country. If factor supplies were variable or changed significantly, the production possibilities and thus the comparative costs would shift.
Relationship Between Assertion and Reason
The reason (fixed factor supplies) directly supports the assertion (static character). The assumption of fixed factors of production is a key reason why the comparative cost model does not dynamically adjust to changes. Therefore, the fixed nature of factor supplies is a fundamental element contributing to the static nature of the theory.
Conclusion: Both Assertion (A) and Reason (R) are correct, and Reason (R) provides a valid explanation for Assertion (A).
Important Questions from Theories of international trade
The following statements relate to transnationality. Choose the correct code for the statements being correct or incorrect.
Statement I: The UNCTAD developed an index to compare the transnationality of countries in which TNCs operate.
Statement II: The UNCTAD followed parameters like FDI flow as a percentage of gross fixed capital formation, FDI inward stock, value added by foreign affiliates and jobs created by them.
Heckscher-Ohlin Theory of factor endowment suggests which of the following types of relationships?
(A) Production — Marketing relationship
(B) Land — Labour relationship
(C) Marketing — Capital relationships
(D) Labour — Capital relationships
(E) Technological complexities
Choose the correct answer from the options given below:
According to the Heckscher-Ohlin theory, which one of the following statements is correct?
Given below are two statements:
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 II: 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:
Match List I with List II
LIST I (Theory) LIST II (What Nation's do) A. Mercantilism I. The range of products made or grown for export would depend upon the relative availability of different factors in each country. B. Theory of Absolute Advantage II. Gold and silver are the mainstay of national wealth C. Theory of Comparative Advantage III. Countries should specialize in the production of goods for which they have absolute advantage D. Factor Endowment IV. Nations should produce those goods for which they have the greatest relative advantage Choose the correct answer from the options given below:
