Assume a labor abundant economy and you are considering the income distribution effect on this economy resulting from international trade. Pick a statement that can best describe that effect, given provisions of Heckscher-Ohlin model. Select one – the most appropriate answer.

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Question restatement: We are in a labor-abundant economy and we examine how income distribution changes under international trade per the Heckscher-Ohlin (HO) model. Choose the statement that best describes the effect.

Option 1: 'Wage and interest rate on capital will decline in both sectors.' In HO with trade, the economy tends to experience an increase in the price (wage) of the abundant factor (labor) and a decrease in the price (rental rate) of the scarce factor (capital). Saying both wage and capital rents decline in both sectors contradicts the standard factor-price effects of trade; thus this option is incorrect.

Option 2: 'Wage is expected to increase in the sector producing exported good.' While it is true that employment and demand for labor rise in the labor-intensive exporting sector, HO trade effects are typically discussed at the economy-wide level: the wage tends to rise across the economy, not only in the exporting sector. This option is narrower than the full implication and therefore not the best general description.

Option 3: 'Wage is expected to increase in both sectors.' This matches the HO intuition for a labor-abundant country: opening to trade raises the return to the abundant factor (labor), which tends to push wages up. In both sectors, labor is used in varying intensities, so the overall wage tends to rise, making this the most representative description of the distributional effect.

Option 4: 'Interest rate on capital will fall in import-competing sector.' While the rental rate on capital is expected to fall when capital is a relatively scarce factor, the HO framework typically predicts a decline in the rental rate for capital across the economy due to the reallocation of resources toward the labor-intensive export sector. Focusing only on the import-competing sector is an incomplete characterization and not the best general statement.

Option 5: 'Interest rate on capital will go up in both sectors.' This runs counter to the HO prediction that the abundant factor’s price tends to increase (labor), while the scarce factor’s price tends to fall (capital). Therefore, this option is incorrect.

Option 6: 'Wage and interest rate on capital will increase in both sectors.' As explained, the abundant factor’s price (wage) tends to rise, but the rental rate of capital does not rise in both sectors under HO trade; it generally falls. This option incorrectly combines rising wages with rising capital rents.

In summary, among the provided statements, the one that best captures the HO model’s typical income-distribution effect for a labor-abundant economy engaging in trade is that wages rise in both sectors. This reflects the general shift in demand toward labor as the economy specializes according to comparative advantage and the abundant factor gains relative return.

econ_420_120255_249094 Lesson 5 Quiz 2

Assume a labor abundant economy and you are considering the income distribution effect on this economy resulting from international trade. Pick a statement that can best describe that effect, given provisions of Heckscher-Ohlin model. Select one – the most appropriate answer.

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