Question

If relatively capital-abundant country A opens trade with relatively labor-abundant country B and the trade takes place in accordance with the Heckscher-Ohlin theorem, what would be the consequence for factor prices (w/r) in the two countries? a. (w/r) rises in A and falls in B b. (w/r) rises in A and also rises in B c. (w/r) falls in A and rises in B d. (w/r) falls in A and also falls in B

Answer 1

C) (w/r) falls in A and rises in B

Step-by-step explanation:

Since country A has abundant capital, but lacks labor, the price of labor will originally be very high, but since the country is trading with country B, then the price of labor will decrease. On the other hand, in country B there exists an abundance of labor, so the price of labor was originally very low. As they engage in trade with country A, the price of labor will increase.