Assume two countries Argentina and Brazil that produce two goods, corn and wine. Assume that land is specific to corn, capital is specific to wine, and labor is free to move between the two industries. Assume that Brazil has a comparative advantage in corn, and Argentina has a comparative in wine. Brazil and Argentina sign a free trade agreement, and we want to study the consequences of this trade agreement.

a) Is it possible that real wages move in opposite directions in these two countries with the trade agreement? Explain.

b) What is the impact of opening trade on the real return to capital and land in Brazil and in Argentina? Explain.

c) In each country, has the specific factor in the export industry gained or lost, and has the specific factor in the import industry gained or lost? Explain

d) Now assume that corn is produced with labor and capital (instead of land). Moreover, Brazil and Argentina, as part of the agreement, implement reforms so that capital and labor become perfectly mobile across industries. Assume that wine is capital intensive relative to corn. Brazil still has comparative advantage in corn and Argentina in wine. Which group, capital owners or workers, are better off with the trade agreement in Brazil and in Argentina compared with autarky? Explain.