The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. $$\begin{array} { | c | c | c | }
\hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \
\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \
\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \
\hline
\end{array}$$ Which of the following is most likely to happen if country A engages in free trade with other countries?
A)The prices of both bread and wine will fall in the domestic market.
B)The price of bread will fall but the price of wine will rise in the domestic market.
C)The prices of both bread and wine will rise in the domestic market.
D)The price of bread will rise but the price of wine will fall in the domestic market.

Question

The following input-requirements data are for country A, a capital-abundant country where they produce nothing but bread and wine using only capital and labor as inputs. $$\begin{array} { | c | c | c | } 
\hline & 1 \text { pound of bread } & \text { 1 gallon of wine } \
\hline \text { Capital input } & 5 \text { units } & 20 \text { units } \
\hline \text { Labor input } & 4 \text { units } & 10 \text { units } \
\hline
\end{array}$$ Which of the following is most likely to happen if country A engages in free trade with other countries?
A)The prices of both bread and wine will fall in the domestic market.
B)The price of bread will fall but the price of wine will rise in the domestic market.
C)The prices of both bread and wine will rise in the domestic market.
D)The price of bread will rise but the price of wine will fall in the domestic market.

Quizplus · Accepted Answer

Country A is capital-abundant and uses more capital relative to labor to produce wine than bread. According to the Heckscher-Ohlin theorem, a country will export the good that intensively uses its abundant factor of production. Therefore, Country A is likely to export wine, increasing its price domestically, and import bread, reducing its price domestically.

The Following Input-Requirements Data Are for Country A, a Capital-Abundant