Comprehension Test 3
Read the following passage carefully and answer the questions that follows:
Under the labour theory of value, the value or price of a commodity depends exclusively on the amount of labour going into the production of the commodity. This implies that either labour is the only factor of production or labour is used in the same fixed proportion in the production of all commodities and that labour is homogeneous, i.e., of only one type. Since neither of these assumptions is true, we cannot base the explanation of comparative advantage on the labour theory of values specifically, labour is not the only factor of production, nor is it used in the same fixed proportion in the production of all commodities. For example, much more capital equipment per worker is required to produce some products, such as steel, than to produce other products such as textile. In addition, there is usually some possibility of substitution between labour, capital and other factors in the production of most commodities Furthermore, labour is obviously homogeneous but varies greatly in training, productivity and wages. At the very least, we should allow for different productivity of labour. Indeed, this is how the Ricardian theory of comparative advantage has been tested empirically. In any event, the theory of comparative advantage need not be based on the labour theory of value but can be explained on the basis of the opportunity cost theory which is acceptable. To be noted is that Ricardo himself did not believe in the labour theory of value mid used it only as a simple way to explain the law of comparative advantage. The law of comparative advantage is sometimes referred to as the law of comparative cost.
1. What does the Labour Theory of Value imply?
(a) Labour is an extra factor in production
(b) Labour has a limited role in production
(c) Labour has the highest value in production
(d) Commodity price and labour value are directly related
2. In the Labour Theory of Value, when it comes to production of commodities, engagement of labour is
(a) heterogeneous
(b) in fixed proportion
(c) in varies proportion
(d) capital intensive
3. Products like steel need
(a) less workers
(b) more workers
(c) more machines
(d) less machines
4. The Ricardian Theory is examined on the basis of
(a) labour value
(b) homogeneity of labour
(c) different levels of labour productivity
(d) law of possibility
5. According to the author of the passage
1. labour is the basis of commodity pricing
2. labour can be substituted with capital
3. less capital equipment per worker is required for products like textile
4. opportunity cost can help explain comparative advantage
5. Ricardo used the labour theory of value only to explain comparative cost
6. Ricardo was not sure of his own theory
Choose the correct option:
(a) 1, 2 and 3
(b) 2, 3 and 4
(c) 4, 5 and 6
(d) 3, 4 and 5
ANSWERS
1. Option (d) is correct.
According to labour theory of value, the price of a commodity depends on the amount of labour being used for production. This means that labour is the only factor of production being used or is used in the fixed proportion.
2. Option (b) is correct.
According to labour theory of value, the labour is engaged in a fixed proportion to that of the commodity being produced and it is homogeneous.
3. Option (c) is correct.
According to the paragraph, more capital equipment is required per worker for production of steel in comparison to products like textile.
4. Option (c) is correct.
The Ricardian theory of competitive advantage has been tested based on possibilities of different levels of productivity of labour based due to different training, etc.
5. Option (d) is correct.
According to the author, Ricardo used the labour theory to explain comparative cost only. He used the opportunity cost concept to explain the theory of comparative advantage. Author also pointed out that more capital equipment is required per worker for production of steel in comparison to products like textile.