In the Heckscher-Ohlin Model, as trade occurs in a capital-abundant country, increased imports will force domestic import-competing firms to decrease price and production. Labor and capital will move to exporting firms. What will then happen to wages and returns to capital?
A) Both wages and returns to capital will increase.
B) Both wages and returns to capital will decrease.
C) Wages will increase and returns to capital will decrease.
D) Wages will decrease and returns to capital will increase.

Question

Quizplus · Accepted Answer

As labor and capital move to exporting firms, the demand for labor in export industries increases, leading to higher wages. However, the demand for capital in export industries decreases, leading to lower returns to capital. Overall, the increase in wages is smaller than the decrease in returns to capital, resulting in a net decrease in returns to factors of production (i.e. wages and returns to capital).

In the Heckscher-Ohlin Model, as Trade Occurs in a Capital-Abundant