Consider two countries, Home and Foreign, trading two goods, Rice and Car. The Home country is...

Consider two countries, Home and Foreign, trading two goods, Rice and Car. The Home country is endowed with abundant capital relative to labor and hence has a comparative advantage to specialize in Cars; whereas the Foreign country is endowed with abundant labor and specializes in Rice. Once they start trading, the price of cars decreases, and the price of rice increases in the Foreign country. How would the increase in the price of rice affect the income of each of the following factors under each trade model in the Foreign country?

a. Ricardo Trade model

i. Real wage earned by labor

b. The Specific-factors trade model

i. Rental rate of capital

ii. Rental rate of land

iii. Real wage earned by labor

c. The Heckscher- Ohlin (H.O.) Trade model

i. Rental rate of capital

ii. Real wage earned by labor

d. Is there a gain from trade for the foreign country under the H.O. Model? Explain

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Expert Solution

Rahul Sunny answered 1 year ago

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