Suppose that the home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured output. What is the effect on the return of capital after trade occurs?
A) The return on capital increases.
B) The return on capital decreases.
C) The return on capital does not change.
D) The effect cannot be determined.

Question

Quizplus · Accepted Answer

In the specific-factors model, when a country has a comparative advantage in a particular sector (in this case, manufacturing) and begins to trade, resources will shift towards that sector to capitalize on the comparative advantage. Since capital is a specific factor used in manufacturing, the increased production in the manufacturing sector will lead to an increased demand for capital. This increased demand raises the return on capital.

Suppose That the Home Country in the Two-Sector (Manufacturing and Agriculture)