KSLU Solved Question Papers
International Trade Economics
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 10
2021 Sep Examination
munotes.in
Mumbai
B.A. LL.B. (Five Years) Sem 10 International Trade Economics 2021 Sep Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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The question paper reproduced here is the paper as set by Karnataka State Law University at the 2021 Sep examination.
Contents
The questions below are the paper as Karnataka State Law University set it at the 2021 Sep examination, in the order it was set.
MarksPage
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2021 Sep examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 80 · 20 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1
(a)Explain comparitive advantage theory and its significance in International Trade.[10]
Answer
For full marks, cover: the problem absolute advantage could not solve; David Ricardo's theory of comparative advantage (On the Principles of Political Economy and Taxation, 1817); its assumptions; Ricardo's own example of England and Portugal, worked through; the idea of opportunity cost; the gains from trade and the range of the terms of trade; the significance of the theory (the case for free trade, specialisation, the WTO's foundation, India's experience); its criticisms and later developments (Heckscher-Ohlin, new trade theory, competitive advantage); a conclusion.
The problem
Adam Smith showed that trade benefits two countries when each is absolutely better at producing one good. But what if one country is better at producing everything? Smith's theory suggested there would then be no gain from trade. Yet such countries do trade, and both appear to gain. David Ricardo solved the puzzle.
The theory
Ricardo set out the answer in On the Principles of Political Economy and Taxation (1817). A country gains by specialising in the good in which its relative efficiency is greatest, or its disadvantage smallest. It should import the good in which its relative efficiency is lowest. This holds even if it is more efficient in both goods. What matters is comparative, not absolute, cost.
Assumptions
- Two countries, two goods.
- Labour is the only factor of production, and the value of a good is the labour it takes.
- Labour moves freely within a country but not between countries.
- Costs per unit are constant.
- There are no transport costs or trade barriers.
- There is full employment and perfect competition.
Ricardo's example
Ricardo gave the number of men needed for a year to produce a given quantity of each good.
| Country | Cloth | Wine |
|---|---|---|
| England | 100 | 120 |
| Portugal | 90 | 80 |
Portugal is better at both: it needs fewer workers for cloth (90 against 100) and for wine (80 against 120). Yet it gains by specialising.
- Relative costs. In Portugal, wine costs 80/90, about 0.89 units of cloth. In England, wine costs 120/100, or 1.2 units of cloth. Portugal is relatively better at wine.
- In England, cloth costs 100/120, about 0.83 units of wine. In Portugal, cloth costs 90/80, about 1.13 units of wine. England is relatively better at cloth.
Without trade, England uses 220 workers and Portugal 170 to make one unit of each good. With specialisation, England puts its 220 workers into cloth, making 2.2 units. Portugal puts its 170 workers into wine, making about 2.1 units. World output of both goods rises above the 2 units of each made before. By exchanging cloth for wine, both countries can consume more than before.
Opportunity cost
Later economists, notably Gottfried Haberler, restated the theory in terms of opportunity cost: the amount of one good given up to produce another. A country has a comparative advantage in the good it can produce at the lower opportunity cost. This freed the theory from the labour theory of value.
Gains from trade and the terms of trade
Trade is worthwhile for both countries if the exchange rate between the goods, the terms of trade, lies between their home cost ratios. Here, one unit of wine must exchange for between 0.89 and 1.2 units of cloth. The exact point, which decides how the gains are shared, depends on demand in each country. John Stuart Mill explained this through reciprocal demand.
Significance in international trade
1. The core case for free trade. If every country gains by specialising on comparative advantage, tariffs and quotas reduce total welfare. This idea underpins the GATT and the WTO.
2. Every country has something to trade. Even a poor country with low productivity in all goods has a comparative advantage in something. This answers the fear that weak economies cannot gain from trade.
3. Specialisation and efficiency. Resources move to their most productive uses, raising output and real incomes.
4. A guide to policy. It explains why protecting industries where a country is relatively inefficient is costly.
5. India's experience. Before 1991, India's import substitution policy kept resources in industries where it had no comparative advantage. After liberalisation, it expanded exports in software services, pharmaceuticals and textiles, where its relative costs are lower.
Criticisms and later developments
- Unrealistic assumptions. Labour is not the only factor; transport costs and trade barriers exist; costs change with scale.
- Static view. It takes comparative advantage as given. In reality it can be built by investment, education and policy, as East Asian economies showed.
- Distribution ignored. It shows that a country gains in total, but some groups within it lose.
- The Heckscher-Ohlin theory explains comparative advantage by differences in factor endowments: countries export goods that use their abundant factors intensively.
- New trade theory stresses economies of scale and product variety, explaining trade between similar countries.
- Michael Porter's competitive advantage focuses on how firms and nations create advantage through innovation.
Conclusion. Ricardo's theory of comparative advantage shows that trade benefits countries even when one is more efficient in everything. Each must specialise where its relative cost is lowest. His England and Portugal example proves the point, and the terms of trade decide how the gains are shared. The theory remains the intellectual foundation of free trade and of the WTO. Later theories have refined it, but none has displaced its central insight.
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