If a capital-abundant country freely trades with a labor-abundant country, there will be a tendency for:
A) wages to rise relative to the price paid to capital in the capital-abundant country.
B) wages to fall relative to the price paid to capital in the capital-abundant country.
C) wages to rise relative to the price paid to capital in both countries.
D) wages to fall relative to the price paid to capital in both countries.
E) the price of labor and capital to stay the same.

Question

Quizplus · Accepted Answer

According to the Heckscher-Ohlin model, in a capital-abundant country, free trade will lead to an increase in the return to capital relative to wages because the country will export capital-intensive goods and import labor-intensive goods. This increases the demand for capital and reduces the demand for labor relative to capital, causing wages to fall relative to the price paid to capital.

If a Capital-Abundant Country Freely Trades with a Labor-Abundant Country