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.

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

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

3. 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

4. Now assume that Argentina implements a labor market reform that reduces mobility of labor across industries. Specifically, assume that labor is now a specific factor to both industries. Land is still specific to corn, and capital is still specific to wine. Can the free trade agreement with Brazil increase income inequality in Argentina with this new labor market structure? Explain.