Consider a specific factor model of international trade. There are two sectors: manufacturing and agriculture. Labor is mobile between these two sectors but capital is speciÖc to manufacturing and land is speciÖc to agriculture. The production function of manufacture is subject to diminishing marginal productivity with respect to labor (given Öxed capital). Similar assumption is made with respect to the production function of agriculture with Öxed land input. All markets are competitive.

a. Given output prices pm; the price of manufacture and pa; the price of agriculture, explain how the wage is determined in this economy by using a graph.
b. Suppose the international price of manufactures, increases by 10% and that of food increase by 5%. What can you say about the resulting change in the wage rate? Justify your answer with a graph?
c. In b: does the welfare of labor change unambiguously? Justify your answer.
d. In b: what can you say about the welfare change of capital owners? Explain your answer precisely.
e. In b: what can you say about the welfare change of land owners? Explain your answer precisely.
f. Suppose the home and foreign country share the same homothetic preferences but the home countryís relative supply curve of cloth/food (as a function of pC =pF ) lies to the right of the relative supply curve of the foreign country(namely, C F > C F at each pC =pF After trade begins, how would the relative price of home country respond? Which good would the home country export? Answer using a graph.

Answer for the question:

Consider a specific factor model of international trade. There are two sectors: manufacturing and agriculture. Labor is mobile between these two sectors but capital is speciÖc to manufacturing and land is speciÖc to agriculture. The production function of manufacture is subject to diminishing marginal productivity with respect to labor (given Öxed capital). Similar assumption is made with respect to the production function of agriculture with Öxed land input. All markets are competitive.

a. Given output prices pm; the price of manufacture and pa; the price of agriculture, explain how the wage is determined in this economy by using a graph.

b. Suppose the international price of manufactures, increases by 10% and that of food increase by 5%. What can you say about the resulting change in the wage rate? Justify your answer with a graph?

c. In b: does the welfare of labor change unambiguously? Justify your answer.

d. In b: what can you say about the welfare change of capital owners? Explain your answer precisely.

e. In b: what can you say about the welfare change of land owners? Explain your answer precisely.

f. Suppose the home and foreign country share the same homothetic preferences but the home countryís relative supply curve of cloth/food (as a function of pC =pF ) lies to the right of the relative supply curve of the foreign country(namely, C F > C F at each pC =pF After trade begins, how would the relative price of home country respond? Which good would the home country export? Answer using a graph.

is given in the attachment.

Explanation:

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