Suppose that Brazil is a capital-abundant country and Paraguay is a labor-abundant country. Describe the potential migration of the factors of production between the two countries. Explain the potential effects on the returns to capital and labor in each country.

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Quizplus · Accepted Answer

The Answer is Labor would tend to flow from Paraguay, where labor is relatively cheap, to Brazil. Capital would tend to flow from Brazil, where capital is relatively cheap, to Paraguay. The international movement of labor would stop at the point where the return to labor in the two countries equalized. A similar process would occur with respect to capital.

Suppose That Brazil Is a Capital-Abundant Country and Paraguay Is