Question

In: Economics

Two countries, Spain and Portugal, use two inputs, capital and labor, to produce two goods, wine...

Two countries, Spain and Portugal, use two inputs, capital and labor, to produce two goods, wine and cheese. Wine is relatively capital intensive in production and Spain is the relatively capital abundant country.

4) According to the Factor Price Equalization Theorem wages (earnings from labor) and rent (earnings from capital) between Spain and Portugal will equalize:

Question 4 options:

with migration of labor and free international movement of capital.

solely due to labor migration.

solely due to the free international movement of capital.

due to both free trade in final goods and free movement of the factors.

due to free trade in final goods alone.

Solutions

Expert Solution

If wine is relatively capital intensive in production and Spain is the relatively capital abundant country, Spain will specialize in production of wine and export a part of the production for cheese (produced by Portugal).

This is based on the argument that the labour-abundant country specialises in the export of the labour-intensive commodity because labour is a relatively cheaper factor compared with capital. On the other hand, the capital-abundant country specialises in the export of capital-intensive commodity on account of capital being a relatively cheaper factor there.

The export of wine by Spain creates relative scarcity of capital and consequently price of capital rises. On the opposite, the export of labor- intensive commodity (cheese) by Portugal will result in its scarcity there. It will cause a rise in the price of labor (wages). These relative changes in K-L ratio will continue until the K-L ratios in both the countries become exactly equal. Along with it, the prices of the two factors also undergo changes (rise in interest rate in Spain and rise in wage rate in Portugal) in such a manner that there is ultimate equalisation of prices of two factors in both the countries.

Thus,  According to the Factor Price Equalization Theorem wages (earnings from labor) and rent (earnings from capital) between Spain and Portugal will equalize: (d)due to free trade in final goods alone.

Rahul Sunny answered 6 months ago
Next > < Previous

Related Solutions

Two countries, Spain and Portugal, use two inputs, capital and labor, to produce two goods, wine...
Two countries, Spain and Portugal, use two inputs, capital and labor, to produce two goods, wine and cheese. Wine is relatively capital intensive in production and Spain is the relatively capital abundant country. 5) According to the Rybczynski Theorem, if Portugal were a small country with a free trade policy, growth of the labor force would cause: Question 5 options: wages to fall, and the reward to capital to increase in Portugal. expansion of the cheese industry and contraction of...
Consider two countries​ (Home and​ Foreign) that produce goods 1​ (with labor and​ capital) and 2​...
Consider two countries​ (Home and​ Foreign) that produce goods 1​ (with labor and​ capital) and 2​ (with labor and​ land). Initially, both countries have the same supply of labor ​(100 units​ each), capital, and land. The capital stock in Home then shrinks. This change shifts in both the production curve for good 1 as a function of labor employed and the associated marginal product of labor curve. Nothing happens to the production and marginal product curves for good 2. a....
Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2...
Consider two countries (Home and Foreign) that produce goods 1 (with labor and capital) and 2 (with labor and land) according to the production functions q1 = L10.5K0.5 and q2 = L20.5T0.5 where Li is the labor input in sector i = 1, 2, K is capital, and T is land. a. Suppose there is capital inflow from the foreign country so that K increases. How would this affect the marginal product of labor in sector1. (If you do not...
The countries of Utopia and Dystopia can each produce two goods: wine and cars. If Utopia...
The countries of Utopia and Dystopia can each produce two goods: wine and cars. If Utopia produces only wine, it can produce 80 barrels per year; if it produces only cars, it can produce 40 cars per year. If Dystopia produces only wine, it can produce 60 barrels per year; if it produces only cars, it can produce 90 cars per year. Indicate the opportunity cost of producing cars and wine in Utopia and Dystopia by reproducing the table below...
A firm uses two inputs, labor and capital, to produce a good. To keep up with...
A firm uses two inputs, labor and capital, to produce a good. To keep up with the story, let zℓ ≥ 0 denote the units of labor and zk ≥ 0 the units of capital. The firm’s technology is expressed as a production function f(zℓ, zk) = 20 z1/5 ℓ z3/5 k . Let w > 0 and r > 0 be the cost of hiring a unit of labor and a unit of capital, respectively. (a) Find the technical...
Consider an economy in which two factors of production, labor and capital, produce two goods, capital...
Consider an economy in which two factors of production, labor and capital, produce two goods, capital intensive pharmaceuticals and labor-intensive clothing. Suppose that both factors of production are freely mobile across both industries and that all producers, consumers, capitalists and workers are price-takers. Suppose that there are currently steep tariffs on all imported goods, but there is a bill before Parliament to eliminate those tariffs, and the government has invited citizen representatives of workers and capitalists to express their opinions...
Suppose there are two inputs in the production function, labor and capital, and these two inputs...
Suppose there are two inputs in the production function, labor and capital, and these two inputs are perfect substitutes. The existing technology permits 5 machines to do the work of 2 workers. So the production function is f(E, K) = 2K + 5E. The firm wants to produce q units of output, where q > 0 is some number. Suppose the price of capital is $10 per machine per hour. What combination of inputs will the firm use if the...
Suppose there are two inputs in the production function, labor and capital, and these two inputs...
Suppose there are two inputs in the production function, labor and capital, and these two inputs are perfect substitutes. The existing technology permits 3 machines to do the work of 2 worker. So F(E,K)=2K+3E. The firm wants to produce 60 units of output. Suppose the price of capital is $10 per machine per hour. What combination of inputs will the firm use if the wage rate is $10 or $15 or $20 per hour? What if the firm wants to...
Suppose there are two countries (a capital-abundant country and a labor-abundant country) and two goods (labor-intensive...
Suppose there are two countries (a capital-abundant country and a labor-abundant country) and two goods (labor-intensive good X and capital-intensive good Y). The two countries have identical demand for the two goods and are considering forming a free trade agreement. However, while this agreement received support from most voters in country A, many voters in country B were concerned that the agreement will likely widen income inequality in country B. Please identify which country is likely labor abundant and which...
In a Heckscher-Ohlin model, suppose there are two countries: Scotland and Portugal. Two goods are produced...
In a Heckscher-Ohlin model, suppose there are two countries: Scotland and Portugal. Two goods are produced in this world: cheese ( C) and wine (W). Cheese and wine are both produced using two factors of production: labour (L) and land (T). Wine is land-intensive while cheese is labour-intensive. Suppose that Scotland and Portugal have the exact same quantity of labour, but Scotland has more land than Portugal. Assume that the post-trade world relative price of cheese is the mean (average)...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT