Suppose that the Home country in the twosector
(manufacturing and agriculture) specificfactors model
Has a comparative advantage in manufactured output.
After trade occurs, the return on capital will
____________ the price of the manufactured good.
A)increase faster than
B)increase slower than
C)increase at the same rate as
D)decrease faster than

Question

Suppose that the Home country in the two­sector
(manufacturing and agriculture) specific­factors model
Has a comparative advantage in manufactured output.
After trade occurs, the return on capital will
____________ the price of the manufactured good.
A)increase faster than
B)increase slower than
C)increase at the same rate as
D)decrease faster than

Quizplus · Accepted Answer

According to the specific-factors model, after trade, the return on the abundant factor (in this case, capital) will increase faster than the price of the abundant factor's output (manufactured goods). Since the Home country has a comparative advantage in manufacturing, it will specialize in producing and exporting manufactured goods, leading to an increase in demand for capital in the manufacturing sector. This increased demand will drive up the return on capital in the Home country faster than the price of manufactured goods.

Suppose That the Home Country in the Two­sector

Suppose That the Home Country in the Twosector