Question

According to the factor price equalization theorem, if country B is labor abundant, then if country B initiates trade with country A Group of answer choices wages should rise and rents should fall in A. wages should fall and rents should rise in A. wages and rents should fall in A. rents and rents should rise in A.

Answer 1

Answer:

wages should rise and rents should fall in A

Explanation:

The Factor Price Equalisation Theory states that when two countries trade, the price of identical factors of production will tend to be equalised across the countries. Factors of production include wage rate and rent of capital.

So if a country that is labour abundant trades with another country A there will be tendency for exportation of the excess labour of country B to country A.

As a result country A will become more labour intensive and wages of workers will rise since focus is more on use of labour.

However since less capital will now be used the money spent on renting capital will reduce.