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 change to the return on land after trade occurs?
A) The return on land increases.
B) The return on land decreases.
C) The return on land does not change.
D) The effect cannot be determined.

Question

Quizplus · Accepted Answer

In the specific-factors model, factors of production can move between industries, but not between countries. When the home country has a comparative advantage in manufacturing, it will increase its production of manufactured goods and decrease its production of agricultural goods. This will lead to an increase in demand for manufacturing workers and a decrease in demand for agricultural workers, which will decrease the return on land (which is used in agriculture). Therefore, the return on land will decrease.

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