Spain produces cars and ham. It uses labor and capital as production inputs. Spain engages in international trade and starts exporting cars, a capital-intensive good, at the trade equilibrium. In the long run, Spain will experience Group of answer choices increase in real wages and decrease in real rental rates increase in real wages and real rental rates decrease in real wages and increase in real rental rates decrease in real wages and real rental rates
Question
Spain produces cars and ham. It uses labor and capital as production inputs. Spain engages in international trade and starts exporting cars, a capital-intensive good, at the trade equilibrium. In the long run, Spain will experience Group of answer choices
increase in real wages and decrease in real rental rates
increase in real wages and real rental rates
decrease in real wages and increase in real rental rates
decrease in real wages and real rental rates
Solution
The answer to this question can be found using the Heckscher-Ohlin model of international trade, which predicts how trade affects the distribution of income within trading partners. The model suggests that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively.
In this case, Spain is exporting cars, a capital-intensive good. This means that the demand for capital in Spain will increase, leading to an increase in the real rental rates. On the other hand, the demand for labor, the other factor of production, will decrease as it is not as intensively used in the production of the exported good. This will lead to a decrease in real wages.
So, the correct answer is: decrease in real wages and increase in real rental rates.
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