In the 2x2x2 Heckscher-Ohlin analysis, if an relatively labor-abundant country is opened To trade, then, as the movement to trade takes place, the capital/labor ratio used in the Country's export industry will __________ and the capital/labor ratio used in the Country's import-competing industry __________.
A) increase; will decrease
B) increase; also will increase
C) decrease; also will decrease
D) decrease; will increase

Question

Quizplus · Accepted Answer

In the Heckscher-Ohlin model, when a labor-abundant country opens to trade, it specializes in the labor-intensive good (its export industry), increasing its production. This leads to an increase in the demand for labor in the export industry, raising wages and encouraging the use of more capital relative to labor to save on labor costs, thus increasing the capital/labor ratio. In the import-competing industry, production decreases as the country imports goods that are capital-intensive. This leads to a release of both capital and labor, but since the industry is shrinking, it may also seek to become more efficient by increasing its capital/labor ratio, especially as capital becomes relatively more abundant due to its release from the contracting sector.

In the 2x2x2 Heckscher-Ohlin Analysis, If an Relatively Labor-Abundant Country