(a) Discuss the theory of acquired advantage in international trade using suitable examples. (15 marks) (b) Do you think that…

(a) Theory of acquired advantage. Adam Smith distinguished natural advantage (climate, soil, minerals) from acquired advantage, created by skills, technology and organisation. The theory holds that comparative advantage is not simply given; it can be built. Its sources include learning-by-doing and increasing returns (Krugman: specialisation that begins by historical accident and is locked in by scale economies); technology gaps (Posner) and the product cycle (Vernon), in which an innovating country exports a new product until the technology diffuses; human capital and R&D; and Porter's "diamond" of home demand, supporting industries, rivalry and firm strategy. Examples: Japan, with no iron ore or oil, built a lead in automobiles and electronics through lean production and R&D; Switzerland in watches and pharmaceuticals; Taiwan in semiconductor fabrication through foundry specialisation; India in IT services and generic pharmaceuticals, built on technical education, English-language skills and clusters in Bengaluru and Hyderabad. The policy implication is that infant-industry support, R&D and skill formation can shift a country's advantage over time, which contrasts with the Ricardian and Heckscher–Ohlin view that advantage follows given technology or endowments.

(b) Nominal exchange rate and the relative price of Indian goods. Not necessarily. The nominal rate E (rupees per unit of foreign currency) is the price of currencies; the relative price of Indian goods is the real exchange rate, RER = E·P_f/P_d, which the RBI tracks through its trade-weighted, inflation-adjusted REER indices. A nominal depreciation cheapens Indian goods only if domestic prices do not rise as much: if India's inflation exceeds that of its partners, the REER may stay unchanged or even appreciate despite a nominal fall, as happened in several years of the 2010s. Other breaks in the link: pass-through is incomplete, since exporters price to market and India's exports have high import content, so costs rise with depreciation; the Marshall–Lerner condition (sum of export and import elasticities greater than one) may fail in the short run, producing a J-curve, because crude oil and electronics imports are price-inelastic; the rupee–dollar rate may differ from the trade-weighted nominal rate; and faster productivity growth in tradables raises non-tradable prices and appreciates the RER (Balassa–Samuelson) with no change in the nominal rate. Hence the nominal rate is a poor guide to competitiveness.

(c) Trade blocs: categories and benefits to less developed economies. By depth of integration: (1) a preferential trading area, with tariff preferences on selected goods (SAPTA); (2) a free trade area, with no internal tariffs but separate external tariffs (SAFTA, ASEAN's AFTA, USMCA); (3) a customs union, adding a common external tariff (SACU, the EU's customs union); (4) a common market, adding free movement of labour and capital (the EU single market); (5) an economic union, adding harmonised policies, and with a common currency a monetary union (the Eurozone). Position: blocs benefit less developed economies conditionally. Gains: (i) Viner's trade creation and scale economies in a larger market, which matter where national markets are tiny; (ii) foreign investment, technology spillovers and entry into global value chains, as in ASEAN; (iii) greater bargaining power in multilateral negotiations; (iv) policy commitments that lock in reforms. Costs: (i) trade diversion, when imports shift from a cheaper outside source to a costlier partner; (ii) loss of tariff revenue, important in small budgets; (iii) polarisation, in which the more industrialised member captures industry (Myrdal's backwash effects), a reason for compensation mechanisms; (iv) rules of origin and non-tariff barriers, and low complementarity among members, which keeps SAFTA's intra-regional trade share very small. India's experience is mixed: its FTAs with ASEAN and others widened some bilateral deficits, and it stayed out of the RCEP in 2019 over such concerns. Gains therefore depend on complementarity, depth of integration and compensation for losers.