Thinking of the specific factors model, suppose we have two countries with two sectors; manufacturing and agriculture. In the home country, the price of the manufacture good is $10, and the quantity of manufactured goods produced is 10 units. The price of the agriculture good is $5 and the quantity of the agriculture goods are 20. The wage in both sectors is $5, the quantity of labor in the manufacturing sector is 12 while the quantity of labor in the agricultural sector is 10. The rental rate to capital (which is a specific factor for the manufacturing sector) is $10 and the amount of capital in that sector is 4. The rental rate to land (which is the specific factor for the agricultural sector) is also $10 and the amount of land in that sector is 5.
a) What is the sales revenue of the manufacturing sector?
b) What are the payments to labor in the manufacturing sector?
c) What are the payments to capital in the manufacturing sector?
d) What is the sales revenue of the agricultural sector?
e) What are the payments to labor in the agricultural sector?
f) What are the payments to land in the agricultural sector?
Now assume that the home country opens up to trade, the price of the manufactured good goes up to $11 while the price of the agricultural good remains unchanged. The wage in both sectors rises from $5 to $5.25.
g) What is the change to the rental on capital?
h) What is the change to the rental on land?
i) Are workers better off or worse off following the opening of trade?