If relatively capital-abundant country A opens trade with relatively labor-abundant Country B and the trade takes place in accordance with the Heckscher-Ohlin theorem,What would be the consequence for factor prices (w/r) in the two countries?
A) (w/r) rises in A and falls in B
B) (w/r) rises in A and also rises in B
C) (w/r) falls in A and rises in B
D) (w/r) falls in A and also falls in B

Question

Quizplus · Accepted Answer

According to the Heckscher-Ohlin theorem, when a capital-abundant country (A) trades with a labor-abundant country (B), the relative demand for labor in country A will increase, raising wages (w) relative to the return on capital (r). Conversely, in country B, the relative demand for capital will increase, raising the return on capital (r) relative to wages (w). This leads to a convergence in factor prices between the two countries, with (w/r) falling in the capital-abundant country (A) and rising in the labor-abundant country (B).

If Relatively Capital-Abundant Country a Opens Trade with Relatively Labor-Abundant