INTERNATIONAL TRADE

1.What are the characteristic of International Trade?

Ans:

When trade takes place between the resident of two different countries it is said to be International Trade or Foreign Trade. Both domestic trade and international trade arise from division of labour and specialization. But there are certain differences between the two types of trade. Some special characters are to be shown in the international trade. a) Factor of production are not mobile within the International trade, i.e. factors cannot move freely. b) There are more differences in natural resources and efficiency of labours. c) In International trade exchange of foreign currency is essential. d) In International trade economic system are vary from one country to another country. e) In International trade import and export are restricted in certain stage.

2. What are the differences between International trade and Domestic trade? International Domestic trade trade a) Factors of a) Factors of production are not production are mobile within the mobile. International trade. b) There are many b) There are not differences in many differences in natural resource natural resources and and efficiency of efficiency of labours. labours. c)In International c) In Domestic trade trade exchange of exchange of foreign foreign currency is currency is not essential. essential. d) In International d) In Domestic trade trade economic economic system are system are vary not vary from one from one country to country to another another. country. e) In International e) There is no trade import export restriction on import are restricted in and export in Domestic certain stage. trade. 3. Discuss Adam Smith absolute difference cost theory?

Ans: Adam Smith theory of absolute cost difference is the oldest theory of International trade. According to Smith international based on territorial division of labours and specialization of labours. On his opinion every country produce and export their commodity to another country for cost efficiency thats mean huge production minimize the absolute cost. By a example this theory can be explained: hours) Labour cost of production (in

Commodity X Commodity Y Country A 5 10 Country B 10 5 let us suppose there are two countries A and B. Both the country produce X and Y products. Labour cost is the only cost of production. Country A produce 1 unit of X which require 5 unit of labour and 1 unit of labour require 10 unit of labour whereas country B produce 1 unit of X which require 10 unit of labour and 1 unit of Y require 5 unit of labour. Here it is seen that commodity X is produce at lower cost in country A and commodity Y in B. therefore, country A is enjoy an absolute advantages in X commodity

whereas country B in Y commodity. According to Smith country A specialized in production of X and country B in production of Y. country A should export X to country B whereas country B export Y to country A. for these trade both country will be benefit. This is absolute cost advantages theory of Adam Smith. 4. Write a short note on World Trade Organization, World Bank, International Monetary Fund? 5. Differences between G.A.T.T. and W.T.O 6. Relationship between Balance of payments and Balance of trade and Balance of current account 7. What is free trade advantages and disadvantages of it?

RENT
Ricardian theory of rent: - In the Ricardian theory rent can arise owing to two reasons. Firstly: - rent can arise even if all the plots of land are homogeneous, due to the scarcity of land is known as scarcity rent.

Secondly: - Rent can arise due to the differences in the qualities of land. Such rent is known as differential rent. Let us now see how these two types of rent arise. Scarcity rent: - let us assume that there is an island which is made up of homogeneous plots of land. All plots of land are assumed to be suitable for the cultivation of only one crop. Let us now assume that a farmer arrives and want to farm any plot of land on these island. Since there is a perfect competition among landlords, he will not be required to pay any rent. Let us now assume that the success of first farmer attracts new farmer who arrive at the island. As long as there are not enough farmer to be able to cultivate the whole island, no rent will be paid. Now suppose that all plots of land are brought into cultivation and still there are farmers who want to farm land on the island. They will be willing to pay rent for it. Rent will then be charged. All the farmers will have to pay rent and all will pay the same rent. In this way as new farmer arrive, the demand for land will increase. But the supply of land is fixed. As the demand for land increases, rent also increase. This type of rent is called scarcity rent.

It is not a part of cost of production. It is a surplus. Differential rent: - Let us now assume that in the imaginary island there are three grades of land. Grade A, grade B, grade C in descending order of their fertility. When farmer arrive at the island they will first cultivate grade A land. Now suppose those grades A land are exhausted. Then the new farmer will cultivate grade B lands. When farmer start cultivating grade B land, they will not have to pay any rent on grade B lands. But rent now arises on grade A lands and it is equal to the difference between the productive of the two grades of land. Grade B land are exhausted, grade C land will be taken up for cultivation. Grade B land will now earn rent and rent on grade A land will also increase. In this way as more and more inferior grades of land are brought under cultivation, rent on superior plots of land increases.