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15 December, 23:35

In the Heckscher-Ohlin model, when there is international-trade equilibrium:

A. the capital-rich country will charge more for the capital-intensive good than the price paid by the capital-poor country for the capital-intensive good.

B. workers in the capital-rich country will earn more than those in the poor country.

C. the workers in the capital-rich country will earn less than those in the poor country.

D. the capital-rich country will charge less for the capital-intensive good than the price paid by the capital-poor country for the capital-intensive good.

E. the relative price of the capital-intensive good in the capital-rich country will be the same as that in the capital-poor country.

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Answers (1)
  1. 16 December, 00:18
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    E. the relative price of the capital-intensive good in the capital-rich country will be the same as that in the capital-poor country.

    Explanation:

    Heckscher-Ohlin International Trade theory states that : a country should export the good which uses its abundant resource intensively, & import the good which uses its its scarce resource intensively.

    Example : If country 1 is capital abundant, it should export capita intensive good C. And, it should import labour intensive good L from capital abundant country 2.

    Implication : Capital abundant (rich) country has low price of capital intensive good, Capital scarce (poor) country has high price of capital intensive good. This provides the rationale of above specialisation export - import benefit

    Export of capital intensive good from capital abundant (capital rich) country decreases their domestic supply. This increases their price in exporting country. Import of these goods in capital scarce (capital poor) country increases supply in imported markets. So, it decreases their price in importing country.

    This happens till relative price of the capital-intensive good in the capital-rich country will be the same as that in the capital-poor country.
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