Suppose there are initially two closed economies, Country A and Country B. Assume A has a relative abundance of capital, while B has a relative abundance of labor.

a) Prior to opening for trade, how do the initial real wages compare across the two countries? How do the initial real interest rates compare? How do you know?

b) After opening for trade, if we assume perfect capital and labor mobility, in which direction will capital flow? In which direction will labor migrate?

c) What is the result of open borders on the real interest rate and real wage rate in Country A?