Switzerland exports watches to Russia. Watches are relatively capital intensive in their production process. With trade, the price of watches rises by 10 percent in Switzerland. According to the magnification principle:

Question

Quizplus · Accepted Answer

According to the magnification principle, the price effect of a change in the price of a good will magnify throughout the production process, and affect the prices of other factors of production. Since watches are capital-intensive, a 10% increase in the price of watches would likely result in a higher increase in the price of capital in Switzerland, as capital is a key input in the production of watches. Therefore, we would expect the price of capital to rise by more than 10 percent in Switzerland.

Switzerland Exports Watches to Russia