Suppose that there are two goods, clothes and mobile phones, and two factors of production, skilled and unskilled labor. There are three countries: Sweden, with a high ratio of skilled to unskilled workers; Mexico, with a medium ratio; and Bangladesh, with a low ratio. In each country, both goods are produced from the two kinds of labor using constant-returns-to-scale technology, and the two production functions are the same for all three countries. In each country, mobile phone production is skilled-labor-intensive relative to clothes production. Suppose that, initially, each country has a high MFN tariff, high enough that trade is reduced essentially to zero. Initially, there are no PT As.
(a) Suppose that Sweden and Mexico form a free-trade agreement, and once it is in effect each country's MFN tariff is unchanged and both countries still produce both goods. For both countries in the agreement, what will be the effect on (i) real incomes for both kinds of labor in both countries in the agreement; (ii) real income for the country as a whole; and (iii) income inequality? (Obviously numbers are not possible, but you should be able to identify the direction of change in each case.)
(b) Now, answer the same question, but instead of a free-trade agreement between Sweden and Mexico, suppose that it is between Mexico and Bangladesh.
(c) If your predicted outcome for Mexico is different in (a) and (b), briefly explain why.