Imagine a country with two specific factors land and capital and one mobile factor of production labor. In this economy there are two industries each of which uses one specific factor and both industries use mobile factor labor.
1) How is labor allocation between two sectors determined in this model?
2) Show the domestic equilibrium using PPF.
3) Show what happens to this equilibrium if the price of a product produced bycapital- specific industry rises and that of the other remains constant.
4) With this relative price change, what happens to income distribution inside the country?
5) Using this insight, can you say what happens to income distribution in this model once the country is opened for trade? Which specific factors gain and which one loses? What happens to labors’ income?