Carefully Explain, for Each of the Following Two Statements, Why

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The Answer is (a) This statement is FALSE. In a 2x2x2 Heckscher-Ohlin context, when a relatively labor-abundant country moves from autarky to trade, the real return to capital in the import-competing industry actually increases, while the real return to capital in the export industry decreases. This is because in a labor-abundant country, the relative abundance of labor compared to capital means that the return to capital will be higher in industries that are relatively more capital-intensive, such as the import-competing industry. On the other hand, the return to capital will be lower in industries that are relatively more labor-intensive, such as the export industry.

(b) This statement is TRUE. In the specific-factors model, with capital fixed in each sector, when a relatively labor-abundant country moves from autarky to trade, the real return to capital in the import-competing industry decreases and the real return to capital in the export industry also decreases. This is because in the specific-factors model, factors of production are immobile between sectors, so when the country opens up to trade, the return to capital in both industries will decrease as the relatively more abundant factor (labor) gains from trade, while the relatively scarce factor (capital) loses out.

Carefully Explain, for Each of the Following Two Statements, Why

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Carefully Explain, for Each of the Following Two Statements, Why

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