Assume that a capital-abundant country trades only two goods with the rest of the world, medical equipment and corn. Medical equipment is relatively capital-intensive. According to the Rybczynski theorem, the relative price of the goods remaining unchanged, an increase in the country's endowment of capital will cause the output of medical equipment to _____ and the output of corn to _____.

Question

Quizplus · Accepted Answer

According to the Rybczynski theorem, an increase in the country's endowment of capital will cause the output of the relatively capital-intensive good to rise and the output of the relatively labor-intensive good to fall. In this case, medical equipment is the relatively capital-intensive good and corn is the relatively labor-intensive good, so an increase in the country's endowment of capital will cause the output of medical equipment to rise and the output of corn to fall. Therefore, the best choice is A.

Assume That a Capital-Abundant Country Trades Only Two Goods with the Rest