Question

Let us assume that cloth-making (labor-intensive) and farming (land-intensive) are the only two sectors of production in a country. If this country is labor-abundant, and if trade corresponds to the Heckscher-Ohlin theory, which of the following groups will gain in the short-run, but lose in the longrun, from the opening of trade?a. Domestic landowners in the farming sectorb. Domestic landowners in the cloth-making sectorc. Foreign landowners in the farming sectord. Foreign workers in the cloth-making sectorExplain why the country would lose in the long run

Answer 1

Answer: B, Domestic landowners in the clothing sector

Explanation:

This is because the profitability of goods is determined by input costs. Goods that require inputs that are locally abundant are cheaper to produce than those goods that require inputs that are locally scarce.