SCENARIO: CANADA AND THE UNITED STATES
Canada and the United States produce computers and
Chemicals using labor and capital as the only inputs in
Production.The United States is capital abundant, and
Canada is labor abundant.Computer production is more
Labor intensive than chemical production in both countries.
Reference: Ref 47
(Scenario: Canada and the United States) What does the
HeckscherOhlin model predict will happen to wages and
Returns to capital after trade takes place between Canada
And the United States?

Question

SCENARIO: CANADA AND THE UNITED STATES
Canada and the United States produce computers and
Chemicals using labor and capital as the only inputs in
Production.The United States is capital abundant, and
Canada is labor abundant.Computer production is more
Labor intensive than chemical production in both countries.
Reference: Ref 4­7
(Scenario: Canada and the United States) What does the
Heckscher­Ohlin model predict will happen to wages and
Returns to capital after trade takes place between Canada
And the United States?

Quizplus · Accepted Answer

According to the Heckscher-Ohlin model, when trade takes place between two countries with different factor endowments (in this case, capital abundance in the US and labor abundance in Canada), the prices of the goods produced using the abundant factor (in this case, chemicals in the US and computers in Canada) will increase in the exporting country and decrease in the importing country. This will lead to an increase in wages for workers in Canada who produce computers (because computer production is more labor intensive) and a decrease in returns to capital in Canada. Therefore, choice A is the correct answer.