The world consists of two large countries Agraria and Industria. Both countries have two sectors/products Food and Manufacturing and two factors of production, labour and capital. Food is the labour intensive sector while manufacturing is capital intensive. Agararia is relatively more labour abundant than Industria. All markets are perfectly competitive and both factors are perfectly mobile within each country.

a) Show and explain the impact of free trade on product and factor prices in Agraria and Industria.

b) Show the possible welfare impact(s) in Agraria of an ad valorem tariff on the import of Agraria. (Note: Use a general equilibrium/standard trade model framework)

c) Assume that Agraria is a democracy with two competing political parties and that the costs of lobbying are very high for the import competing sector in Agraria. What would be the optimal trade strategy for the two political parties in Agraria? Explain your answer using an appropriate framework.