Question

Essay Questions. Explain carefully using theories.

Which theorem states that free trade leads to an equalization of wages and rental rates in two trading countries? Explain HOW and WHY wages and rental rates ultimately equalize.

What happens to the production of both goods in a country when there is an increase in labor? Which theorem will you apply here?

Answer 1

Answer:(1)When the prices of the output goods equalized between two nation,when countries move into free trade agreement,the prices of factor of production (like labor) will also get equal.This is known as factor-price equalization theorm.

(2)Labor's marginal productivity rises due to amount infuse in the production as capital.Value of productivity based on finished products dictated by the respective goods in market.Therefore, when two countries comes under free trade agreement,price,rent and wages rates will gets equal.

(3) When there is an increase in labor,the rates of labor concentrated good will be went down in comparision to the price of that good in some other place or country where labor might not be in rich but get abundance of capital.When they made pact for trading in each other country,firms want to maximize their profit by move their products in each other's market.So,labor rich country will move their product to capital rich country and capital rich country will their product in labor rich country in order to maximize their profit.This procedure or pattern also known as the Hecksher-Ohlin Theorm.