Factor Intensity and Relative Costs

Steps:

• Define capital-intensive economy: relies heavily on machinery and capital over labor due to abundance and lower relative cost of capital.
• Define labor-intensive economy: relies heavily on workers over machinery due to abundance and lower relative cost of labor.
• Factor intensity arises from relative factor prices: firms use more of the cheaper input.
• Thus, Germany's capital intensity implies capital cheaper than labor there; Indonesia's labor intensity implies labor cheaper than capital there, with cross-country comparisons showing capital scarcer (costlier) in Indonesia and labor scarcer (costlier) in Germany.

Why A is correct:

• Matches Heckscher-Ohlin model: factor intensity reflects relative abundances and prices, so capital is relatively costlier in labor-abundant Indonesia than labor in capital-abundant Germany, and vice versa.

Why the others are wrong:

• B: Factor intensity concerns production inputs, not sector employment distribution.
• C: Population growth unrelated to current factor intensity classifications.
• D: Low-cost labor fits Indonesia, but capital efficiency claim misrepresents intensity as technological superiority, not cost-driven input mix.

Final answer: A