Assume that there are only two countries in the world, Rougia and Abiland, and that there are only two goods, skateboards and rice. Skateboards are labour intensive to make, and rice is land intensive to make.

a. (2) Assume that Rougia is more productive at producing all goods compared to Abiland. Which country will have higher income? Please explain your reasons.

b. (4) Why might Rougia want to trade with Abiland, even if it is more productive at producing all goods?

c. Now assume a slightly different situation: Rougia has an absolute advantage in rice

(skateboards are expensive and rice is cheap in Rougia), and Abiland has an absolute

advantage in skateboards (rice is expensive and skateboards are cheap in Abiland). Under these conditions, Rougia and Abiland sign a free trade deal, and start to trade with each other (they go from having no trade to perfectly free trade).

i. (2) Which country will import rice? import skateboards? export rice? export

skateboards and Why?

ii. (2) What will happen to prices of rice and prices of skateboards in each country, and

why?

iii. (2) In the short run, the labourers in which country will gain? lose? The landowners in

which country will gain and lose?

iv. (4) Using Stolper-Samuelson theory, how will the labourers and landowners in each

country be affected in the long run? Explain why.