Assume that Country A is relatively abundant in labor and Country B is relatively abundant in land Note that wages are the returns to labor and rents are the returns to land According to the factor price equalization theorem, once Country A begins specializing according to comparative advantage and trading with Country B: A. wages and rents should fall in Country A B. wages and rents should rise in Country A C. wages should rise and rents should fall in Country A D. wages should fall and rents should raise in Country A ?
Correct answer: C. wages should rise and rents should fall in Country A
- A. XA. wages and rents should fall in Country A
- B. wages and rents should rise in Country A
- C. wages should rise and rents should fall in Country A
- D. wages should fall and rents should raise in Country A
Explanation
Country A's labor abundance gives it a comparative advantage in labor-intensive goods, raising demand for labor and wages while reducing demand for land and rents. This is the factor-price effect predicted by specialization and trade.
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