Feenstra and Taylor describe the "magnification effect" of trade. This effect describes how:
A) workers tend to complain more about trade than is justified.
B) owners of capital can "magnify" their earnings if they are able to trade.
C) small changes in relative prices as a result of trade lead to larger long-run changes in the real wage or rental of factors.
D) unemployment is a big problem among workers but not capital because workers have to move when they are laid off.

Question

Quizplus · Accepted Answer

The magnification effect of trade refers to the idea that small changes in relative prices resulting from trade can lead to larger long-run changes in the real wage or rental of factors. For example, if a country specializes in exporting goods that use a lot of labor, then the demand for labor will increase, causing wages to rise in that industry and potentially in others as workers shift to where wages are higher. Similarly, if a country specializes in exporting goods that use a lot of capital, then the demand for capital will increase, causing the rental rate of capital to rise. These changes in relative prices can have magnified effects on the economy over time.

Feenstra and Taylor Describe the "Magnification Effect" of Trade