1. Suppose that a country has two sectors, food and clothing. Labor is mobile between sectors, but capital and land are not. Capital is “specific” (i.e., only used) to make clothing. Land is specific to make food. If trade liberalization would result in the country exporting food, would the capital holders prefer autarky or free trade? Why?

2. Markovia and Pokolistan only trade with each other. Both countries grow potatoes and make steel. Potato production is relatively labor intensive. Steel production is relatively capital intensive. Markovia is relatively capital abundant. Pokolistan is relatively labor abundant.

a) According to the Heckscher-Ohlin model, what product would Markovia export? Why?

b) According to the Stolper-Samuelson theorem, if Markovia put a tariff on potatoes, what would be the impact on the wage-to-rent ratio (W/R) in both countries? Why?