Computers are relatively capital intensive in their production, while wool is relatively labor intensive. Australia is relatively capital abundant and New Zealand is relatively labor abundant. According to the Heckscher-Ohlin theorem and the factor price equalization theorem:
A) we would expect the return to capital in Australia to rise relative to the return to labor in Australia.
B) we would expect the return to capital in Australia to fall relative to the return to labor in Australia.
C) we would expect the return to capital in Australia to equal the return to labor in Australia.
D) we would expect the return to capital in Australia to fall relative to the return to labor in New Zealand.

Question

Quizplus · Accepted Answer

According to the Heckscher-Ohlin theorem, a country will export goods that use its abundant factor intensively. Australia, being capital abundant, will export capital-intensive goods like computers, increasing the demand for capital and thus raising the return to capital relative to labor.

Computers Are Relatively Capital Intensive in Their Production, While Wool