Q7
(a) Discuss the theory of acquired advantage in international trade using suitable examples. (15 marks) (b) Do you think that movement of the nominal exchange rate of Rupee represents a corresponding movement of Indian goods vis-á-vis foreign goods ? Explain your position. (15 marks) (c) What are the different categories of trade blocks ? Are trade blocks beneficial to less developed economies ? Justify your answer. (20 marks)
हिंदी में प्रश्न पढ़ें
(a) उपयुक्त उदाहरणों का उपयोग करते हुए अंतर्राष्ट्रीय-व्यापार में अर्जित-लाभ के सिद्धांत की चर्चा कीजिए । (15 अंक) (b) क्या आप के विचार से रुपये के मौद्रिक-विनिमय दर की गतिशीलता, विदेशी वस्तुओं की तुलना में भारतीय वस्तुओं की गतिशीलता को परिलक्षित करती है ? अपनी स्थिति को स्पष्ट कीजिए । (15 अंक) (c) व्यापार-खंडों की विभिन्न श्रेणियाँ क्या हैं ? क्या व्यापार-खंड अल्पविकसित अर्थव्यवस्थाओं के हित में हैं ? अपने उत्तर को उचित सिद्ध कीजिए । (20 अंक)
Directive word: Discuss
This question asks you to discuss. The directive word signals the depth of analysis expected, the structure of your answer, and the weight of evidence you must bring.
See our UPSC directive words guide for a full breakdown of how to respond to each command word.
How this answer will be evaluated
Approach
The directive 'discuss' demands a comprehensive, balanced treatment with critical examination. For part (a), explain acquired advantage with technological/scale economies examples (~300 words, 25% time). For part (b), analyse the nominal-real exchange rate divergence using PPP and trade-weighted indices (~300 words, 25% time). For part (c), classify trade blocks and critically evaluate their asymmetric benefits for LDCs with Indian evidence (~500 words, 35% time). Reserve 15% for integration and conclusion.
Key points expected
- For (a): Distinguish acquired advantage from natural advantage; explain technological advantage (product/process innovation) and economies of scale/external economies with examples like Japan's auto industry or India's IT services
- For (b): Explain why nominal exchange rate movements may not reflect real competitiveness due to inflation differentials, productivity changes, and trade-weighted basket effects; cite REER trends and India's experience
- For (b): Discuss the J-curve effect, Marshall-Lerner condition, and why pass-through to trade volumes is incomplete or delayed
- For (c): Classify trade blocks as PTAs, FTAs, customs unions, common markets, economic unions with ascending integration levels
- For (c): Analyse trade creation vs trade diversion effects; assess static and dynamic gains for LDCs including terms of trade risks and asymmetric power dynamics
- For (c): Evaluate Indian experience with SAFTA, ASEAN FTA, RCEP negotiations to illustrate benefits and challenges for developing economies
Evaluation rubric
| Dimension | Weight | Max marks | Excellent | Average | Poor |
|---|---|---|---|---|---|
| Concept correctness | 22% | 11 | Precisely distinguishes acquired from natural advantage in (a); correctly explains why nominal and real exchange rates diverge using PPP and productivity-adjusted measures in (b); accurately classifies trade blocks and applies Viner's trade creation/diversion framework with proper welfare analysis in (c) | Basic definitions correct but conflates some concepts (e.g., mixes nominal and real exchange rates); lists trade block types without clear hierarchy; limited welfare economics application | Fundamental errors such as treating acquired advantage as factor endowment, asserting nominal rate alone determines competitiveness, or confusing customs union with common market |
| Diagram / model | 18% | 9 | Uses Krugman's economies of scale model for (a); presents REER calculation formula or J-curve diagram for (b); draws Viner's trade creation/diversion welfare triangles or Kemp-Wan customs union diagram for (c) | Generic supply-demand diagrams without specific model application; missing diagrams for at least one sub-part; poorly labelled axes | No diagrams where essential (especially for trade effects); incorrect diagrams that misrepresent welfare changes or exchange rate mechanisms |
| Quantitative reasoning | 16% | 8 | Calculates or cites real exchange rate appreciation/depreciation with inflation adjustment; quantifies trade creation/diversion effects with trade intensity indices; references India's REER trends (36-currency basket) and bilateral trade shares | Mentions quantitative relationships qualitatively without specific numbers; vague references to trade volume changes without magnitude | No quantitative dimension; confuses percentages with percentage points; makes unsupported claims about exchange rate or trade impacts |
| Indian / empirical examples | 22% | 11 | For (a): cites India's pharmaceutical (process innovation) or space technology as acquired advantage; for (b): analyses 2013 rupee depreciation or recent REER trends with limited pass-through to exports; for (c): evaluates SAFTA's limited success, ASEAN FTA impact on Indian manufacturing, and RCEP withdrawal calculus | Generic examples (Japan, EU) with superficial Indian references; mentions trade agreements by name without specific impact assessment | No Indian examples; factually incorrect claims about India's trade agreements or exchange rate regime |
| Policy implication | 22% | 11 | Derives industrial policy lessons from acquired advantage theory; recommends REER targeting over nominal rate fixation; proposes safeguards for LDCs in trade blocks (rules of origin, extended timelines, capacity building) with specific reference to India's negotiating stance | Generic policy conclusions without specific instrument recommendations; standard list of trade block benefits without critical nuance | No policy implications; contradictory recommendations (e.g., advocating both protection and free trade without framework); irrelevant policy suggestions |
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