In the short-run (specific-factors) model, what will happen to the rental rate on capital and the wage rate when there is an inflow of FDI into the country?
A) Both the rental rate on capital and the wage rate will increase.
B) Both the rental rate on capital and the wage rate will decrease.
C) The rental rate on capital will increase and the wage rate will decrease.
D) The rental rate on capital will decrease and the wage rate will increase.

Question

Quizplus · Accepted Answer

In the short-run (specific-factors) model, an inflow of FDI into the country will increase the demand for both capital and labor, but since the specific factors (e.g. land, machinery) used in the production of the imported goods will be used more intensively, the demand for capital will increase more than the demand for labor. Therefore, the rental rate on capital will decrease (as there is more capital available, the owners will offer a lower price) and the wage rate will increase (as the demand for labor has increased relative to its supply).

In the Short-Run (Specific-Factors) Model, What Will Happen to the Rental