Assuming Country A is labor-abundant and Country B is land-abundant, per the factor price equalization theorem, when trade begins between them: A. wages and rents drop in A B. wages and rents rise in A C. wages rise and rents fall in A D. wages fall and rents rise in A ?
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Answer: B. wages should rise and rents should fall in Country A
Explanation
The factor price equalization theorem states that international trade equalizes factor prices. Country A is labor-abundant, meaning labor becomes scarcer and more valuable with trade. Higher demand for the abundant factor raises wages while lowering rents for scarce land. The Heckscher-Ohlin model explains trade patterns based on national factor endowments. Abundant factors are intensively used in producing a country's export goods. Factor prices adjust across trading nations until returns to labor and capital equalize.
Trade agreements impact domestic income distribution between workers and property owners. Labor-abundant developing nations see rising wages as they integrate into global markets. Economic theory helps policymakers anticipate winners and losers from international trade. Option a incorrectly claims that both wages and rents should rise in Country A. Option c is incomplete and presents formatting variations compared to correct options. Option d incorrectly suggests wages fall while rents rise for a labor-abundant nation.
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