Germany produces agricultural and manufactured products. When Germany engages in free trade, it starts exporting manufactured products. What are the predictions of the HO model on changes in real rental?Group of answer choicesReal rental rates decrease in manufacturing sector and increase in agricultural sectorReal rental rates increase in manufacturing sector and decrease in agricultural sectorRental rates are not affected by the transition to free tradeNone of the other three options
Question
Germany produces agricultural and manufactured products. When Germany engages in free trade, it starts exporting manufactured products. What are the predictions of the HO model on changes in real rental?Group of answer choicesReal rental rates decrease in manufacturing sector and increase in agricultural sectorReal rental rates increase in manufacturing sector and decrease in agricultural sectorRental rates are not affected by the transition to free tradeNone of the other three options
Solution
The correct answer is: Real rental rates increase in manufacturing sector and decrease in agricultural sector.
Step 1: Understanding the Situation Germany produces agricultural and manufactured products. When it engages in free trade, it starts exporting manufactured products.
Step 2: Understanding the Heckscher-Ohlin (HO) Model The Heckscher-Ohlin model is a theory in international economics that states that countries export what they can most efficiently and plentifully produce. This model indicates that a country should specialize in production of and export goods that require resources (factors) which are abundantly available, and import goods that require resources which are in short supply.
Step 3: Identifying the Correct Answer Given that Germany starts exporting manufactured products, it suggests that Germany has a comparative advantage in manufacturing, possibly due to an abundance of capital, which is a key factor in manufacturing. As a result, the demand for capital in the manufacturing sector would increase, leading to an increase in real rental rates in the manufacturing sector. Conversely, the agricultural sector, which might be more labor-intensive, would see a decrease in demand and thus a decrease in real rental rates.
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