Suppose that the home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured output. Which statement below best describes changes in returns on capital and land after trade occurs?
A) The return on capital and land will both rise.
B) The return on capital and land will both fall.
C) The return on capital will rise and the return on land will fall.
D) The return on capital will fall and the return on land will rise.

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, the return to the factor specific to that sector (capital for manufacturing) will increase due to increased demand for manufacturing goods. Conversely, the return to the factor specific to the sector in which the country does not have a comparative advantage (land for agriculture) will fall, as resources are reallocated towards the more competitive sector.

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