Question

France and Italy only trade with each other. Each produces wine and bread. The production of bread is relatively capital intensive, and the production of wine is relatively labor intensive. France is relatively abundant in capital, while Italy is relatively abundant in labor. According to the Heckscher–Ohlin model, free trade between Italy and France should cause:a. increased real wages in France and increased real returns to capital in Italy.b. increased real wages in both countriesc. decreased real wages in both countries.d. increased real returns to capital in France and increased real wages in Italy.

Answer 1

Answer:

Correct answer is option d. increased real returns to capital in France and increased real wages in Italy.

Explanation:

The Heckscher-Ohlin model demonstrates that the comparative advantage is determined by the interaction between a country's resources, the relative abundance of production factors, and technology. It is the interaction between abundance and intensity with which these resources are exploited the source of comparative advantages.