If Relatively Capital-Abundant Country a Opens Trade with Relatively Labor-Abundant

question 21

Multiple Choice

If relatively capital-abundant country A opens trade with relatively labor-abundant Country B and the trade takes place in accordance with the Heckscher-Ohlin theorem,What would be the consequence for factor prices (w/r) in the two countries?

• A) (w/r) rises in A and falls in B
• B) (w/r) rises in A and also rises in B
• C) (w/r) falls in A and rises in B
• D) (w/r) falls in A and also falls in B

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Definitions:

Consumer Surplus

The gap between the price consumers are ready to offer for a good or service and the effective amount they spend on it.

Trade

The process of purchasing, vending, or trading products and services among individuals or nations.

Factor Endowments

The amount of land, labor, capital, and entrepreneurship that a country or region possesses, which determines its comparative advantage in international trade.

Comparative Advantage

The ability of an individual or entity to produce goods or services at a lower opportunity cost than other producers.