Factor Mobility Limits Trade Gains When Domestic Adjustment Is Easy But International Flows Are Blocked

Steps:

• Specialization requires reallocating factors between goods M and N domestically.
• High domestic mobility enables smooth reallocation, making autarky production efficient with minimal trade need.
• International factor mobility substitutes for goods trade by directly equalizing returns across countries.
• Low international mobility forces reliance on goods trade, but high domestic mobility means little additional benefit from it.

Why C is correct:

• High mobility between goods allows efficient domestic specialization without trade, while low mobility between countries prevents factor arbitrage, minimizing overall gains per Heckscher-Ohlin model extensions on substitutes.

Why the others are wrong:

• A: High international mobility enables direct factor flows, substituting for and enhancing trade benefits.
• B: Low domestic mobility raises adjustment costs, but low international mobility allows goods trade to provide substitute gains.
• D: High international mobility facilitates cross-border factor shifts, offsetting low domestic mobility and boosting efficiency.

Final answer: C