Assume that Mexico is labor abundant and the U.S. is capital abundant. Trade between Mexico and the U.S. would tend to:
A) lower the price of capital in Mexico.
B) raise the price of capital in Mexico.
C) raise the price of labor in the U.S.
D) lower the price of capital in the U.S.
E) lower the prices of both factors in Mexico.

Question

Quizplus · Accepted Answer

According to the Heckscher-Ohlin model, trade will lead to the equalization of factor prices. Since Mexico is labor abundant, it will export labor-intensive goods, increasing the demand for capital and thus lowering its price in Mexico.

Assume That Mexico Is Labor Abundant and the U