If Home is capital abundant, then when it begins to freely
Trade with the rest of the world, the return to capital in
Home should _________ and the real wage in Home
Should _______.
A)fall; rise
B)fall; fall
C)rise; rise
D)rise; fall

Question

Quizplus · Accepted Answer

If Home is capital abundant, then when it begins to freely trade with the rest of the world, the return to capital in Home should rise and the real wage in Home should fall. This is because capital abundance implies that Home has a comparatively high capital-to-labor ratio, while the rest of the world has a lower capital-to-labor ratio. When Home begins to trade, it will export capital-intensive products and import labor-intensive products. This will increase the demand for capital in Home and increase its return, while decreasing the demand for labor and decreasing its real wage.

If Home Is Capital Abundant, Then When It Begins to Freely