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Unit 2: Theories of International Trade




               is not a very damaging criticism. Even if this assumption is removed, it will not make a   notes
               material change in the basic contents of the theory.
          10.   Comparative advantage and specialization: Professor Graham points out that the theory
               loses its ground, when we find that comparative advantages will never lead to complete
               specialization on the part of two countries, which enter into international trade. This may
               happen when one country is big and another small. The small country will be in a position
               to specialize fully as, “it can dispose off its surplus, to the other country. But the bigger
               country cannot have such complete specialization because:
               (a)   It will not be able to meet all its requirements fully from the foreign country; and
               (b)   If  it  will  fully  specialize  in  a  particular  production,  its  surplus  output  will  be  of
                    such a large magnitude that it will not be entirely absorbed by the importing small
                    country.
          self assessment


          Choose the appropriate answers:
          1.   If the cost of production of items A and B in France and Germany are as given below, which
               statement will hold well?

                                             Germany                   France
                      A                        15                        20
                      B                        12                        24
               (a)   France will import A and B from Germany
               (b)   France will import A from Germany
               (c)   France will import B from Germany
               (d)   Germany will import A from France

               (e)   France will export A to Germany and import B from Germany
          2.   If we know that American agriculture is the most efficient in the world, we may say that:
               (a)   If America is also more efficient in the production of all other goods, there could be
                    no gain from trade

               (b)   It would never pay Americans to import food
               (c)   It would always pay Americans to import food
               (d)   America might or might not be a food importer
               (e)   America clearly never exports food

          3.   The assumption made by the theory of comparative advantages is:
               (a)   Full employment
               (b)   Mobility of labour within the country
               (c)   Constant returns to scale
               (d)   All of the above

               (e)   Both (a) and (b) above







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