Assume a nation where labor is mobile between industries but capital is not.The specific-factors model states that trade leads to which of the following?

Question

Quizplus · Accepted Answer

According to the specific-factors model, with mobile labor and immobile capital, trade leads to a decrease in returns to the factors used in the industry producing the import-competing good. This is because imports will increase competition for this good, reducing demand, and hence, profitability. In contrast, the return to capital used in the export industry and the return to labor used in both industries will increase. However, the question specifically asks about the return to capital, and due to the immobility of capital, we can say that the return to capital used in the import-competing industry will decrease. The return to capital used in the export industry may or may not change, depending on whether the nation exports a good that competes with its import-competing industry. Thus, the correct answer is B.

Assume a Nation Where Labor Is Mobile Between Industries but Capital