In a two-country world, if country A is the relatively labor-abundant and country B is the relatively capital-abundant country by the "price" definition of factor abundance (and where w is the wage rate and r is the return to capital), then __________. When the countries move from autarky to Heckscher-Ohlin-type trade, the result will be that __________. A) (w/r)_A (w/r)_B; (w/r)_A will fall and (w/r)_B will rise

Question

In a two-country world, if country A is the relatively labor-abundant and country B is the relatively capital-abundant country by the "price" definition of factor abundance (and where w is the wage rate and r is the return to capital), then __________. When the countries move from autarky to Heckscher-Ohlin-type trade, the result will be that __________. A) (w/r)_A < (w/r)_B; (w/r)_A will rise and (w/r)_B will fall B) (w/r)_A < (w/r)_B; (w/r)_A will fall and (w/r)_B will rise C) (w/r)_A > (w/r)_B; (w/r)_A will rise and (w/r)_B will fall D) (w/r)_A > (w/r)_B; (w/r)_A will fall and (w/r)_B will rise

Quizplus · Accepted Answer

According to the Heckscher-Ohlin model, a country that is relatively labor-abundant (Country A) will have a lower wage-to-rental ratio (w/r) compared to a capital-abundant country (Country B) before trade. When these countries engage in trade, Country A's wage-to-rental ratio will increase due to higher demand for its labor-intensive goods, while Country B's wage-to-rental ratio will decrease as it specializes in capital-intensive goods.

In a Two-Country World, If Country a Is the Relatively