Suppose that the Home country in the twosector
(manufacturing and agriculture) specificfactors model
Has a comparative advantage in manufactured output.
What is the effect on the return of capital after trade
Occurs?
A)The return on capital increases.
B)The return on capital decreases.
C)The return on capital does not change.
D)The effect cannot be determined.

Question

Suppose that the Home country in the two­sector
(manufacturing and agriculture) specific­factors model
Has a comparative advantage in manufactured output.
What is the effect on the return of capital after trade
Occurs?
A)The return on capital increases.
B)The return on capital decreases.
C)The return on capital does not change.
D)The effect cannot be determined.

Quizplus · Accepted Answer

In the specific-factors model, if the Home country has a comparative advantage in manufactured output, trade will lead to an increase in the production and export of manufactured goods. This will increase the demand for capital, which is specific to the manufacturing sector, thereby increasing the return on capital.

Suppose That the Home Country in the Two­sector

Suppose That the Home Country in the Twosector