MODERN THEORY OF TRADE

Indira Gandhi National Open University (IGNOU) has extended the last day of submission of IGNOU Assignments for session June 2020 to 30th April 2020. Candidates who are facing problems in making assignments here is the solution to your problem.

MASTER OF COMMERCE – M.Com First Year (IBO) Solved Assignments for July 2019 and January 2020 Admission Cycles

IBO Tutor Marked Solved Assignment

Course Code: IBO – 01
Course Title: International Business Environment
Assignment Code: IBO-01/TMA/2019-20

Coverage: All Blocks

IBO – 01 International Business Environment Solved Assignment for 2019-20

Q5.) Write notes on the following :

 i) The modern theory of trade 

The modern theory of international trade is also known as the Heckscher-Ohlin theorem. This theory is an improvement over the classical theory. The Classical theory considers the imbalances in the resources, knowledge, and skills available with a particular country, and try to elaborate the strategy used by a specific country to produce various goods to achieve benefits of comparative costs. Each country of the world has unequal availability of resources that are used for productive purposes.

Few countries like India, have relatively more labor, while some others like the US have more land and country like West Germany have more capital. The country has a higher quantum of specific resource will agree to shift to other corners of the world at a cheaper price, in comparison to the resource which scares with them.

Thus, differences in the availability of resource factor will result in differences in the factor prices and, which in turn supports to give rise to differences in comparative costs. According to the modern theory of international trade, a country specializes in the production of a good (and exports it) which uses more of the relatively abundant factor, and imports those goods which use more of relatively scarce factors.

 The modem theories assume the economy of scale in production. An example of economy of scale is shown in the following table:

One may easily check that the technology described above is a departure from the constant returns to scale we have been using so far. For example, the output is doubled from 1 to 2 as labor is less than doubled from 3 to 5. Suppose that there are two similar goods, A and B being produced by the above technology, the economy has 10 units of labor. The consumers will consume the two goods in 1:1 proportion. Therefore the labor force will have to be equally divided in the production of the two goods and 2 units each of A and B will be produced and consumed in the economy. Now suppose there is another economy with the same technology to produce A and B having 10 units of labor. Then it is quite easy to see that one economy produces only A and the other produces the only B and then trade with each other then the consumers in each country will be able to consume 3.5 units each of A and B and be better off than autarky. This is an example of trade taking place between two countries having the same technology and factor endowments simply due to economy of scale. But there is a difference like trade. In the earlier models, the products were different and produced by different technologies and the trade was between two industries, such as one country exporting cloth and importing wheat. This kind of trade is called inter-industry trade. But in the contemporary models' trade is intra-industry, i.e., in the same industry located in two different countries. It is like one country exporting white wine and importing red wine - both goods requiring the same technology as in the above example. It turns out that a very substantial part of world trade is intra-industry in nature which shows the importance of modern theories in the contemporary world.