With free trade, if country X is relatively labor abundant and relatively land scarce and country Y is relatively labor scarce and relatively land abundant, the factor-price equalization theorem predicts that:
A)rents will rise in country X and fall in country Y until they equalize.
B)wages will rise in country X and fall in country Y until they equalize.
C)rents will fall in country Y but will remain unchanged in country X.
D)wages will increase in country Y but will remain unchanged in country X.

Question

Quizplus · Accepted Answer

The factor-price equalization theorem states that with free trade, factor prices (i.e. wages and rents) will equalize between countries as they specialize in producing the goods in which they have a comparative advantage. In this case, country X is relatively labor abundant, so there will be an increase in demand for labor in country X as they specialize in producing goods that require labor. This will lead to an increase in wages in country X. Similarly, country Y is relatively land-abundant, so there will be an increase in demand for land in country Y as they specialize in producing goods that require land. This will lead to an increase in rents in country Y. Overall, wages will rise in country X and fall in country Y until they equalize, while rents will rise in country Y and fall in country X until they equalize.

With Free Trade, If Country X Is Relatively Labor Abundant