(a) "Factor intensity reversal is incompatible with Heckscher-Ohlin model." Examine this statement. (10 marks) (b) Why…

(a) Factor intensity reversal and the Heckscher-Ohlin model

Factor intensity reversal (FIR) occurs when the same good is capital-intensive at one ratio of factor prices and labour-intensive at another, so it may be capital-intensive in one country and labour-intensive in another. The Heckscher-Ohlin (H-O) model of two goods, two factors and two countries assumes that each good has the same factor-intensity ranking at all factor prices. This assumption underlies the H-O trade theorem and factor price equalisation.

With FIR, the ranking is ambiguous. A capital-abundant country could export a good that is labour-intensive at its own prices, factor prices are no longer equalised by trade, and the H-O prediction can fail. So the statement is right in that FIR contradicts the model's assumption and weakens its predictions. But it is not a logical impossibility, and empirical work disagrees on how common FIR is, some studies finding it rare. FIR therefore limits the model, rather than refuting it.

(b) Why currency depreciation is inflationary

Depreciation raises the domestic-currency price of imports, which passes into domestic prices through four channels.

• Import prices: imported consumer goods and fuel become dearer directly. India imports most of its crude oil, so a weaker rupee raises fuel, transport and other prices.
• Input costs: imported raw materials, components and capital goods cost more, and producers pass this on to buyers (cost-push inflation), more so if import demand is inelastic.
• Demand: exports become cheaper abroad and import substitutes more competitive, raising demand for domestic output and pushing up prices, particularly near full capacity.
• Expectations: expected inflation leads workers to ask for higher wages and firms for higher prices, adding a wage-price spiral.

The extent of the effect depends on import dependence, the degree of pass-through and spare capacity, and it is reduced by weak demand, competition among sellers and central bank credibility.

(c) Kuznets's inverted-U curve and environmental degradation

Kuznets's hypothesis held that inequality first rises and then falls as income grows. The same shape has been proposed for the environment as the Environmental Kuznets Curve (EKC): pollution rises in the early stages of growth and falls beyond a turning-point income (Grossman and Krueger, 1991).

The reasons are three effects. The scale effect raises pollution as output grows. The composition effect shifts the economy from agriculture to heavy industry and then to services and cleaner activity. The technique effect brings cleaner technology, stricter regulation and a greater demand for environmental quality as incomes rise.

It can be extended, but with cautions. The evidence is mixed: it holds for some local pollutants like sulphur dioxide but not for carbon dioxide or resource depletion, and pollution may be exported to poorer countries. The turning point is not automatic but depends on policy, institutions and technology. For India, strong policy is needed rather than waiting for growth to clean up.

(d) How the modified HDI improves on the HDI

The original Human Development Index combined life expectancy, adult literacy and enrolment, and GDP per capita by an arithmetic mean. The modified measure (the 2010 revision) improves on it in several ways.

• It uses the geometric mean of the three indices, so a low score on one dimension cannot be fully offset by a high score on another.
• It uses better indicators: mean and expected years of schooling for education, and gross national income per capita, which reflects income received by residents, with its logarithm for diminishing returns.
• It has fixed minimum and maximum goalposts for each dimension.
• It is supplemented by the Inequality-adjusted HDI, which discounts for unequal distribution, the Gender Development Index and the Multidimensional Poverty Index.

It therefore captures uneven development and shortfalls better, although it still omits sustainability, empowerment and political freedom.

(e) Renewable energy and environmental sustainability

Renewable energy such as solar, wind, hydro and biomass can help sustainability in several ways. It replaces fossil fuels, which cuts carbon emissions and local air pollution, reducing climate risk and health costs. It cuts import dependence and improves energy security. Decentralised systems such as rooftop solar, mini-grids and solar pumps give energy access to rural areas without a proportional rise in emissions. It needs less water than thermal power and creates green jobs and new industries.

India has set a target of 500 GW of non-fossil capacity by 2030, and non-fossil sources have reached about half of installed power capacity. For true sustainability, however, challenges of variability, storage and grid integration, land use and waste from old panels and batteries must be managed, through recycling and responsible sourcing.