Assume that a large capital-abundant country trades only two goods with the rest of the world, medical equipment and corn. Medical equipment is relatively capital-intensive. An increase in the country's endowment of capital will cause the price of medical equipment relative to the price of corn to:

Question

Quizplus · Accepted Answer

According to the Heckscher-Ohlin model, a country will export the good that intensively uses its abundant factor of production. If a capital-abundant country increases its capital endowment, it will produce more of the capital-intensive good, which is medical equipment in this case. As the supply of medical equipment increases, its price relative to corn, which is less capital-intensive, will fall. This is because the increased production of medical equipment, due to more available capital, leads to a decrease in its relative price.

Assume That a Large Capital-Abundant Country Trades Only Two Goods