Problem 2

Two countries, Home (H) and Foreign (F) trade agricultural and manufacturing goods (A and M, respectively). Production of either good requires skilled and unskilled labor. Unskilled workers can freely move from one sector to another, while skilled workers cannot.

(a) 5% Identify mobile and industry-specific factors of production

(b) 5% Suppose Home is relatively more productive in agriculture than Foreign. Draw two diagrams, one for H one for F, which illustrate no-trade equilibrium in each county. Compare relative price of agricultural goods in two countries.

(c) 5% Based on your answer in part (b), explain which good Home country will export and import, and why? Explain how openness to foreign trade changes relative price of agricultural goods at Home.

(d) 5% Using a diagram, illustrate the eect of a reduction in price of Home country imports on Home countrys equilibrium nominal wage.