Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

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Figure 12.9 
The two points X & Y on the same iso-quant illustrate this 
point. At point X production process uses more labour relative to 
capital whereas at Y it uses more capital in relation to labour. 
Technically this phenomenon of change in factor intensity owing to 
change in factor price ratio is known as factor intensity reversal. It is 
associated with Leontief's testing of H-0 theory or Leontief Paradox. 
 
12.5 SUMMARY 
 
1. 
The simplest explanation of trade between two countries was 
provided by Adam Smith in his Wealth of Nations (1776).
2. According to the Theory of Absolute advantage by Adam Smith, 
to start trade one country must have absolute cost advantage 
over the other in regard to a particular commodity. 
3. According to the Theory of Comparative Cost by David Ricardo 
a country may be more efficient in general but degree of 
efficiency differs as between two commodities.
4. Opportunity cost is the cost we pay when we give up something 
to get something else.
5. To get a graphical representation of how an economy makes 
decisions on what to produce, or spend their money on, we will 

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use a Production Possibility Curve. It shows the choices a 
country can make with respect to its available resources. 
6. Heckscher Ohlin theorem of factor endowment assumes there is 
no international difference in production function. The same 
commodity is produced by using the same labour capital ratio 
and yet trade takes place.
 
12.6 QUESTIONS 
 
1
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How does one measure factor abundance or factor scarcity? 
What is the reason behind the fact that labour abundant country 
finds it advantages to export labour intensive goods? 
2. A capital abundant country is found to export labour intensive 
goods-Is it possible? Explain fully. 
3. Do you think that H-0 theorem does not pay any attention to 
demand side? If so, state your reasons. 
4. We know technology is an important factor in trade. Can a 
technological change lead to a change in factor intensity of a 
product? 
5. Is there any reason to believe that factor prices will tend towards 
equality after trade? 
6. Suppose a labour abundant country starts concentrating in 
favour of commodities that employ capital intensive mode of 
production. Narrate the type of problems it might face. 
8. What is absolute advantage? How does it differ from 
comparative advantage? Is the later an improvement upon the 
former? 
9. In the absence of trade how does an economy determine 
commodity price? Is it absolute or relative price? Why? 
10. How is the international price ratio settled? Explain fully. 
11. Is there any guarantee that total welfare in the post trade 
situation will necessarily be higher when compared to the pre trade 
situation? 
12. If one introduces many countries and many commodities in 
theory of comparative advantage, what kind of result may be 
expected to follow ? 
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