Question
Consider the specific factors model. Country A and B produce good X and Y using labour (L), capital (K) that is specific to the production
Consider the specific factors model. Country A and B produce good X and Y using labour (L), capital (K) that is specific to the production of good X, and land (T) that is specific to the production of good Y. Consumers in the two countries have identical homothetic preferences over the two goods.
Country A is relatively abundant in (has more) land, T(A)>T(B), and Country A and B have the same endowments of labour, L(A) = L(B), and capital, K(A) = K(B). Explain how the free trade changes the real returns to each of the specific factors, capital return (r(A,K)) and land return (r(A,T)), in terms of the prices of good X and Y, P(A,X) and P(A,Y), in country A. That is, the changes of (i) r(A,K)/P(A,X), (ii) r(A,K)/P(A,Y), (iii) r(A,T)/P(A,X), and (iv) r(A,T)/P(A,Y). Explain your answer in as much detail as possible.
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