Suppose that the Home country in the twosector
(manufacturing and agriculture) specificfactors model
Has a comparative advantage in manufactured output.
Which statement below best describes changes in
Returns on capital and land after trade occurs?
A)The return on capital and land will both rise.
B)The return on capital and land will both fall.
C)The return on capital will rise and the return on land will fall.
D)The return on capital will fall and the return on land will rise.

Question

Suppose that the Home country in the two­sector
(manufacturing and agriculture) specific­factors model
Has a comparative advantage in manufactured output.
Which statement below best describes changes in
Returns on capital and land after trade occurs?
A)The return on capital and land will both rise.
B)The return on capital and land will both fall.
C)The return on capital will rise and the return on land will fall.
D)The return on capital will fall and the return on land will rise.

Quizplus · Accepted Answer

According to the specific-factors model, a country's comparative advantage in manufactured output implies that the relative price of manufactured goods will increase. Therefore, the demand for capital in the manufacturing sector will increase, causing the return on capital to rise. On the other hand, the demand for land in the agricultural sector will decrease, causing the return on land to fall. Therefore, the return on capital will rise and the return on land will fall.

Suppose That the Home Country in the Two­sector

Suppose That the Home Country in the Twosector