(a) Examine whether in Ricardian model, the theory of comparative advantage actually becomes a doctrine of comparative costs. (15 marks)

(b) Distinguish between nominal and effective rates of protection in Standard Trade Model. Suppose
• nominal tar

Question

(a) Examine whether in Ricardian model, the theory of comparative advantage actually becomes a doctrine of comparative costs. (15 marks)

(b) Distinguish between nominal and effective rates of protection in Standard Trade Model. Suppose
• nominal tariff on imported good j is 40%,
• tariff rate on input i is 40%,
• cost share of imported input i in the total cost of production of commodity j is 0·5%.

Determine the effective rate of protection and show that in this case nominal tariff rate is equal to the effective rate of protection. (20 marks)

(c) Illustrate Jagdish Bhagwati's doctrine of 'Immiserising Growth'. (15 marks)

UPSC Answer Check · Accepted Answer

Classical trade theory remains a lens for India’s tariff and export policy because it asks whether gains from trade survive distortions, large-country effects and biased growth.

Ricardian comparative advantage as comparative costs. In Ricardo’s model labour is the only factor, so the cost of a commodity is simply labour required. Comparative advantage therefore reduces to comparing labour cost ratios: a country exports the good with lower relative labour cost. This is not absolute advantage; even if a country is less efficient in both goods, it can gain by specialising in the good where its labour cost disadvantage is smaller. The doctrine is thus a doctrine of comparative costs. Later economists, especially Haberler, reframed it in opportunity-cost terms: the relevant cost is the value of the next best alternative foregone, not physical labour alone. Viner and others argued that calling it a “cost” doctrine can be misleading when multiple factors, capital, land and technology matter; in the Ricardian case the simplification makes comparative advantage and comparative labour-cost ratios identical, but in general opportunity cost is the more general criterion.

Nominal and effective protection. In the standard trade model, the nominal rate of protection is the ad valorem tariff on an imported final good, t_j. The effective rate of protection measures the increase in value added in the protected industry relative to value added at world prices. If an imported input i has cost share a_i and tariff t_i, ERP_j = (t_j - a_i t_i)/(1 - a_i). Here t_j=0.40, t_i=0.40, a_i=0.005. ERP = (0.40 - 0.005×0.40)/(1-0.005) = (0.40-0.002)/0.995 = 0.398/0.995 = 0.40. Thus the nominal and effective rates are equal. More generally, if t_j=t_i, ERP = t_j(1-a_i)/(1-a_i)=t_j, so the equality does not depend on the input share; the very small share merely makes the numerical difference negligible. India’s pre-1991 tariff structure often used ERP to expose how high tariffs on final goods combined with lower tariffs on inputs could overprotect some industries while underprotecting others.

Immiserising growth. Bhagwati showed that growth can lower welfare if terms of trade deteriorate more than output expands. The case requires a large country whose export-biased growth shifts the production possibility frontier outward mainly toward the export good. If foreign demand for exports is inelastic, the extra exports depress the export price. The domestic marginal propensity to consume exportables must be low, so growth adds little home absorption and much more export surplus; a compact condition is that the foreign elasticity of demand for exports plus the domestic marginal propensity to consume exportables is below one, e_f + m_X < 1. An initial tariff-distorted equilibrium can strengthen the effect by making the terms-of-trade response sharper. Diagrammatically, the PPF shifts outward; the export offer curve moves so that the terms-of-trade line rotates against the country; the new consumption possibility line may touch a lower indifference curve than before. India’s historical dependence on primary exports such as cotton, jute and tea illustrates the risk: world demand inelastic and prices volatile, so export-led growth could worsen terms of trade.

Verdict. The Ricardian model is best read as a comparative-cost doctrine only under its single-factor assumption; in richer models opportunity cost generalises it. ERP shows that nominal tariffs can misstate protection, which is why India’s trade reforms needed value-added analysis. Bhagwati’s doctrine warns that growth is not automatically immiserising, but for large, export-dependent economies it can be; policy should therefore diversify exports, manage terms-of-trade exposure and design tariffs with effective, not merely nominal, protection in mind. It also explains India’s later preference for export diversification and tariff rationalisation.

(a) Examine whether in Ricardian model, the theory of comparative advantage actually becomes a doctrine of comparative costs. (15…

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