According to the factor price equalization theorem,if country B is labor abundant,then if country B initiates trade with country A
A)wages and rents should fall in A.
B)rents and rents should rise in A.
C)wages should rise and rents should fall in A.
D)wages should fall and rents should rise in A.

Question

Quizplus · Accepted Answer

The factor price equalization theorem suggests that when countries engage in free trade, the prices of factors of production (like labor and capital) tend to equalize across countries. If country B is labor abundant, it will export labor-intensive goods to country A, increasing the demand for labor in A, which raises wages. Conversely, the increased production in B requires more capital, raising its price (rent) in B and, by extension, leading to a relative increase in rents in A as well due to equalization pressures. Thus, in country A, wages should fall (as it exports capital-intensive goods and imports labor-intensive goods, reducing its relative demand for labor) and rents should rise (as the demand for capital increases with the production of capital-intensive goods for export).

According to the Factor Price Equalization Theorem,if Country B Is