If trade corresponds to the Heckscher-Ohlin theory, which of the following is most likely to happen in the long run after a labor-abundant country engages in free trade?
A)The rate of unemployment in the country is most likely to increase.
B)The total output in the economy will decline.
C)The capital to labor ratio in the export sector will increase.
D)The rental rates of capital will increase but the wage rates will decline.

Question

Quizplus · Accepted Answer

According to the Heckscher-Ohlin theory, a labor-abundant country will have a comparative advantage in producing goods that are labor-intensive. When it engages in free trade, it will export labor-intensive goods and import capital-intensive goods. As a result, the capital to labor ratio in the export sector will increase, as more capital is used in producing the exported goods. This increase in capital intensity will lead to higher productivity and higher wages for workers. Therefore, the correct answer is C.

If Trade Corresponds to the Heckscher-Ohlin Theory, Which of the Following