Consider two economies, Tonyland and Pacoland; two goods, tomatoes and cotton; and two factors, land and capital. Both goods are produced using constant returns to scale technology. Tomatoes are more land intensive in their production process, while cotton is more capital intensive. We know that, after the commercial opening, in Tonyland the capital / land ratio has increased in both industries.

Answer:

(A) What was the relative price of tomatoes P_t / P_a like in autarchy at Tonyland?

(B) After trade liberalization, which country exports what?

(C) Explain which social group is favorable to trade in Tonyland. Why is data on the capital/land ratio important for understanding which group benefits from trade?

(D) Show that Tonyland society benefits from trade. Consider now that another country, Jordiland, requests to join the trade agreement between Tonyland and Pacoland. It turns out that Jordiland is identical to Tonyland:

(E) What is the effect on the final price of the goods after the incorporation of Jordiland to the commercial agreement?

(F) Is Tonyland better off when Jordiland joins the agreement or is he worse off (it would be better to go back to autarchy)?

(G) What social group in Tonyland benefits from Jordiland joining the trade agreement