Test: Theories of International Trade - UGC NET MCQ

The Heckscher-Ohlin theory of international trade posits that a nation's trade patterns are determined by the relative abundance of factors of production it possesses. This theory focuses on factors like land, capital, labor, and entrepreneurship, suggesting that nations tend to export goods that require intensive use of factors they have in relative abundance while importing goods that require scarce factors. This strategy allows nations to maximize productivity and gain from international trade.

The comparative advantage theory in classical trade theories revolves around the concept of comparative costs of production. It suggests that nations should specialize in producing goods where they have a lower opportunity cost compared to other nations, leading to gains from trade. This theory emphasizes the benefits of specialization and trade based on differences in production costs among nations.

According to mercantilist thinking, a nation's wealth and power were believed to come from the assembly of gold and silver. This perspective emphasized the importance of maintaining a "favorable" trade balance to accumulate these precious metals, which were seen as vital for enhancing the nation's economic strength.

Mercantilist policies perceived international trade as a zero-sum game where one nation's gain was considered another's loss. Trade was primarily viewed as a means to acquire more gold, reflecting the belief that a country's economic prosperity was closely tied to its ability to amass precious metals through trade activities.

Assertion is correct as the New Trade Theory emphasizes economies of scale and product differentiation as drivers of international trade.

Reason is correct as imperfect competition is indeed a factor considered in the New Trade Theory.

The Reason statement provides a logical explanation for the Assertion, as imperfect competition allows large-scale producers to benefit from economies of scale, giving them a cost advantage.

While both the assertion and reason are true, the reason does not directly explain the assertion. The reason offers a complementary idea but does not provide a direct causal link to why nations specialize in different stages of production.

The reason adequately explains the assertion. The concept of 'offer curves' in Haberler's theory accounts for the influences of imperfect competition and pricing power, making Reason the correct explanation for Assertion.

• The Assertion is correct because the Factor Endowment Theory does suggest that countries should specialize in and export goods based on their abundant resources.
• The Reason is also correct as it points out the limitations of the theory, mentioning the oversight of economies of scale and the role of technology.
• However, the Reason does not directly explain why countries should specialize based on resource abundance, hence it is not the correct explanation of the Assertion.

Key Points
Heckscher-Ohlin Theory

• According to the Heckscher-Ohlin theorem, if two nations create two things using two different factors of production (such as labor and capital), they will each export the good that utilizes the most plentiful factor the most. 
• The Heckscher-Ohlin Theory, also known as the Factor Proportions Theory, is an economic theory that explains the pattern of international trade based on differences in factor endowments between countries. It was developed by two Swedish economists, Eli Heckscher and Bertil Ohlin, in the early 20th century.
•  For his work on the theory, Ohlin was awarded the Nobel Prize for Economics.

Important Points

• It shows the relationship between Labour and capital according to which countries in which capital is relatively plentiful and labor relatively scarce will tend to export capital-intensive products and import labor-intensive products and vice versa.
• It also shows the  Land — Labor relationship as nations export mostly goods that they have access to plenty of land, labor, and money to create.
• It also considers Technological complexities while importing and exporting the goods which are scarce which leads to the removal of technological complications involved in producing those scarce goods. 
• Hence, (B-Land — Labour relationship), (D-Labour — Capital relationships), and (E-Technological complexities) is the correct answer.

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 I 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 a company's financial statements are converted from one currency to another.

Statement II: Transaction exposure refers to the change in the value of the firm caused by the unexpected changes in the exchange rate.

Statement II, however, is incorrect. Transaction exposure refers to the risk 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.

Therefore, Statement I is true, but Statement II is false.