You are given the following information and will use it to tell a "Specific Factors" story.Although you are not required to draw graphs for this assignment, I *strongly* recommend that you do so for your own practice and to help think about this story.

Assume there is a world with two countries:Econland (EL) and The Republic of Macro (RoM)*.

There are two goods in this world: computers (C) and rice (R).

There are three factors:Labor (L) is mobile; Capital (K) is specific to computers; and Land (T) is specific to rice.

Assume that pretrade (P_C/P_R) for EL is equal to 1/2; and (P_C/P_R)* for RoM* is equal to 4.

STORY (Fill in the blanks; make sure you use the words in italics in your answer):

Pre-trade:Econland (EL) is a very efficient country which means that even before these countries trade, we know that _________________________________________(wages) .The Republic of Macro (RoM)* was a socialist country in which the government, in the past, assigned too much labor to making computers, therefore, at that time is was true that_________________________________________(output).As the ROM* is joining the global economic community, it has now allowed its labor full mobility, and as a result__________________________________________(ppf).

Given what we know about these countries' relative pre-trade relative prices we know EL_______________________________________(comparative advantage) and RoM* ________________________________________ (comparative advantage).

With trade:EL and RoM* decide to "free trade" with each other.This would mean EL would produce_____________________________________(more/less) and RoM* would produce ___________________________________________(more/less).This means that within EL,________________________________(benefit) from trade and_______________________ (lose) from trade.The reverse would be true for RoM*.

Story, cont.(Choose the best answer.)

Assume that with free trade, (P_C/P_R)^FT = 5/8.With this new free trade relative price, it is clear EL's "consumption gains from trade" are ___________________________________(greater than or less than)RoM*'s "consumption gains from trade."

In the RoM* it is unclear whether ____________________________________(capital owners or workers)gain from trade.

As we saw in the Ricardian model, in this model as well trade allows a country to____________________________(consume or produce) beyond its own ppf.