Suppose Country A, a relatively capital-abundant country, experiences further expansion in its endowment of capital. Explain how this might affect its volume (amount) of trade and its terms of trade with the rest of the world. Under what conditions (if any) would the economic well-being of Country A decline after the increase in its capital endowment?

What will be an ideal response?

POSSIBLE RESPONSE: If the amount of capital in Country A increases, the result will be a biased growth toward the production of capital-intensive goods. As a result of this biased growth, if product prices are unchanged, then the country will expand its production of capital-intensive goods and will reduce its production of goods requiring the intensive use of other factors of production (Rybczynski theorem). The country's volume of trade will tend to increase because the increase in demand for the capital-intensive goods is less than the increase in their production. 

If Country A is a large country, an increase in its exports will decrease the international price of the capital-intensive goods relative to the other goods. If this effect is large enough, the result will be immiserizing growth, which will cause the country to lose well-being even though the endowment of one of the factors of production has expanded. An increase in exports will drive down the relative price of Country A's exportable goods in world markets. If the decline in the country's terms of trade outweighs the benefits of the extra ability to produce, the country will be worse off.