Assume that Country A,in the absence of trade,finds itself relatively abundant in labor and relatively scarce in land.The factor endowment theory reasons that with free trade,the internal distribution of national income in Country A will change in favor of:
A) Labor
B) Land
C) Both labor and land
D) Neither labor nor land

Question

Quizplus · Accepted Answer

According to the factor endowment theory, in the absence of trade, Country A with relatively abundant labor and scarce land will specialize in labor-intensive goods and experience an increase in the demand and price of labor, leading to a relatively higher income for labor. With free trade, Country A can trade the goods in which it has a comparative advantage (namely, labor-intensive goods) with other countries and import goods that are land-intensive. As a result, the demand for labor will increase, and the income of labor will increase more than the income of land. Thus, free trade will change the internal distribution of national income in favor of labor.

Assume That Country A,in the Absence of Trade,finds Itself Relatively