If Australia has relatively more land per worker, and Belgium has relatively more capital per worker, then if trade began between these two countries
A) the relative price of the capital-intensive product would decrease in Belgium.
B) relative product prices would diverge between Australia and Belgium.
C) the relative price of the land-intensive product would increase in Australia.
D) the relative price of the land-intensive product would increase in Belgium.
E) the relative price of the capital-intensive product would increase in Australia.

Question

Quizplus · Accepted Answer

According to the theory of comparative advantage, countries will specialize in producing goods in which they have a comparative advantage. In this case, Australia has a relatively greater endowment of land per worker, indicating a comparative advantage in land-intensive products, while Belgium has a relatively greater endowment of capital per worker, indicating a comparative advantage in capital-intensive products. If trade begins between the two countries, then we would expect Australia to specialize in producing land-intensive products, while Belgium would specialize in producing capital-intensive products. As a result, the relative price of the land-intensive product would increase in Australia, as it becomes scarcer due to specialization, while the relative price of the capital-intensive product would decrease in Belgium, as it becomes more abundant due to specialization. Therefore, the correct answer is C.

If Australia Has Relatively More Land Per Worker, and Belgium