Consider two products, automobiles and shoes.If shoes are
Labor intensive and automobiles are capital intensive, what
Can we expect in freetrade conditions?
A)The relative price of automobiles in the autoexporting country will decrease.
B)The relative price of shoes in the shoeexporting country will increase.
C)The capitalabundant country will produce more shoes.
D)The laborabundant country will produce more automobiles.

Question

Consider two products, automobiles and shoes.If shoes are
Labor intensive and automobiles are capital intensive, what
Can we expect in free­trade conditions?
A)The relative price of automobiles in the auto­exporting country will decrease.
B)The relative price of shoes in the shoe­exporting country will increase.
C)The capital­abundant country will produce more shoes.
D)The labor­abundant country will produce more automobiles.

Quizplus · Accepted Answer

In free-trade conditions, capital-intensive products (such as automobiles) will be relatively cheaper to produce and export from capital-abundant countries, while labor-intensive products (such as shoes) will be relatively cheaper to produce and export from labor-abundant countries. Therefore, we can expect the relative price of shoes to increase in the shoe-exporting country, as they will have a comparative advantage in producing shoes.

Consider Two Products, Automobiles and Shoes.If Shoes Are