International Trade Theories

Step 1: Understanding the Heckser-Ohlin theory.
The Heckscher-Ohlin theory of international trade assumes that countries trade based on their relative abundance of factors of production (land, labor, and capital). It assumes fully employed resources, constant returns to scale in production, and differences in factor endowments across countries.

Step 2: Analysis of options.
- (A) All resources are fully employed in both nations: This is correct. The theory assumes full employment of resources in both countries.
- (B) Trade between the two countries is balanced: This is incorrect. The theory does not assume that trade must be balanced, as countries may export and import different quantities based on their comparative advantage.
- (C) Both commodities are produced under constant returns to scale in both countries: This is correct. Constant returns to scale is one of the assumptions of the theory.
- (D) Demand preferences are not identical in both countries: This is correct. The theory assumes that demand preferences differ across countries, leading to international trade.

Step 3: Conclusion.
The incorrect assumption is (B), as the theory does not require trade between the two countries to be balanced.

Step 1: Understanding the offer curve.
An offer curve shows the amounts of exports a country is willing to offer for different amounts of imports at different relative prices. It is a tool in international trade to analyze the terms of trade.

Step 2: Analysis of options.
- (A) Offer curves were devised and introduced in International Economics by Marshall and Edgeworth: This is correct. The offer curve concept was developed by these economists.
- (B) The offer curve of a nation shows the nation's willingness to import and export at various relative commodity prices: This is correct. It represents the trade-off between imports and exports for a country.
- (C) The offer curve of a nation can be derived from the nation's production frontier: This is incorrect. The offer curve is not directly derived from the production frontier but rather from preferences and trading possibilities.
- (D) Offer curve of a nation bends towards the axis measuring the commodity of its comparative disadvantage: This is correct. The curve shows how a country is willing to trade more of the commodity in which it has a comparative disadvantage.

Step 3: Conclusion.
The incorrect statement is (C), as the offer curve is derived from preferences, not directly from the production frontier.

Step 1: Understand the law of comparative advantage.
The law of comparative advantage suggests that trade between two countries will be beneficial if each country specializes in the production of goods for which it has a lower opportunity cost than the other.

Step 2: Analysis of options.
- (A) One nation is less efficient than the other nation in the production of both commodities: This is incorrect. Even if one nation is less efficient in producing both goods, trade can still be beneficial if each nation has a comparative advantage in one of the goods.
- (B) One nation has an absolute advantage with respect to the other nation in the production of both commodities: This is incorrect. Absolute advantage does not determine trade benefits. Comparative advantage, which involves lower opportunity costs, is the key factor.
- (C) The opportunity cost of producing both the commodities is the same in both countries: This is correct. If opportunity costs are the same, there is no incentive for trade, as no country has a comparative advantage.
- (D) The absolute disadvantage that one nation has with respect to the other nation is the same in both commodities: This is correct. If the disadvantage is the same for both countries, there is no basis for trade to be mutually beneficial.

Step 3: Conclusion.
The correct answer is (C) and (D) only.