Consider two products: automobiles and shoes. If shoes are labor intensive and automobiles are capital intensive, what can we expect in free-trade conditions?
A) The relative price of automobiles in the auto-exporting country will decrease.
B) The relative price of shoes in the shoe-exporting country will increase.
C) The capital-abundant country will produce more shoes.
D) The labor-abundant country will produce more automobiles.

Question

Quizplus · Accepted Answer

In free-trade conditions, the capital-intensive product (automobiles) will be relatively cheaper in the capital-abundant country, whereas the labor-intensive product (shoes) will be relatively cheaper in the labor-abundant country. Thus, the relative price of shoes in the shoe-exporting country will increase as shoes are labor intensive.

Consider Two Products: Automobiles and Shoes