Question

If a country finds its comparative advantage in computer productionwhich is capital intensive, what will happen to the rental rate on capital when trade occurs?

A. It will decrease
B. It will increase.
C. It will stay the same.
D. Not enough information is given to answer this question.

Answer 1

The correct answer is (A)

Step-by-step explanation:

If a country is capital intensive then there is an increasing demand for capital in that country. Trade will increase the rental rate on capital, because of the demand for capital in that country. It is an economic phenomenon, an increase in demand increase the price; similarly, an increase in demand for capital will increase the rental rate when a trade occurs.