Trade occurs because of the differences in the proportions of those factors that

Question

Trade occurs because of the differences in the proportions of those factors that are used in producing different goods. Trade causes competing sector in the availability of factor inputs across countries and in the export-oriented sector and in the import- differences; expansion; contraction similarities; expansion; contraction similarities; contraction; expansion differences; contraction; expansion Save Question 4 (10 points) The opening of trade between a land-abundant country and a labor-abundant country should lead to: Higher rents and wages in both countries. Lower rents and wages in both countries. Higher rents in the labor-abundant country and higher wages in the land-abundant country Lower rents in the labor-abundant country and lower wages in the land-abundant country

Explanation / Answer

Ans.

1) A. differences, expansion and contraction

Trade occurs because of differences in the availability of factor inputs across countries and differences in the proportions of those factors that are used in producing different goods. An international trade is due to differences in amount of capital and labour available as well as availability of natural resources. Trade causes expansion in export oriented sector and contraction in import oriented sector. This is because country will export the goods in which it has comparative advantage. So there is expansion in export sector and import sector contracts.

2) D. Lower rents in the labour abundant country and lower wages in the land abundant country

The opening of trade between land abundant country and labour abundant country leads to lower rents in labour abundant country and lower wages in land abundant country. There will be lower wages and higher rents in land abundant country as more labour is being exported by labour abundant country as it is labour extensive. Whereas there are lower rents and higher wages in labour abundant country as there is redistribution of income from capital owners to workers.

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