Question

1. Study the following distribution of factor endowments in country A, B, C, and D.

1. Using the factor endowment model, explain which factor(s) in each country would support and oppose trade liberalization. Explain why. [2 points]
2. Assuming that trade is contracting (diminishing exposure to international trade), discuss the nature of political coalitions and cleavages (urban-rural/ class conflict) in each country?

	Land-Labor Ratio
	High	Low
Economy Advanced	A ABUNDANT Capital Land SCARCE Labor	C ABUNDANT Capital Labor SCARCE Land
Economy Backward	B ABUNDANT Land SCARCE Capital Labor	D ABUNDANT Labor SCARCE Capital Land

Answer 1

A. Country A is capital and land-intensive and relatively scarce in labor implying that it would be able to more abundantly produce goods and services that are more capital and land-intensive compared to labor-intensive goods and services. Hence, country A essentially has a comparative advantage in the production of capital and land-intensive commodities and services relative to goods and services that are labor-intensive meaning that it would export land and capital-intensive products and services and import labor-intensive products and services from other countries. It implies that land and capital providers or producers in the domestic factor or input market in country A would economically benefit from exposure to international trade as due to international exportation, the demand for land and capital would increase among the domestic firms or companies in country-A thereby increasing the respective factor income earned by them and hence, the land and capital producers or providers in country A would support international trade liberalization. On the other hand, the laborers or workers in country A would understandably oppose trade liberalization as due to labor scarcity in the country A it would import the labor-intensive goods and services thereby reducing the labor demand in country A by the domestic firms or companies thereby exerting a negative impact on labor income or wage in country-A. Now, country B is relatively abundant in land and scarce in capital and labor indicating that it would specialize in the production of land-intensive products and services compared to capital and labor-intensive goods and services. It essentially implies that country B has a comparative advantage in producing land-intensive goods and services relative to capital and labor-intensive goods and services signifying that it would export land-intensive goods and services and import capital and labor-intensive commodities and services. Therefore, the demand for land would increase in the domestic factor or input market in country B economically benefitting the landowners or renters in country B due to the export demand in the international market and hence, the landowners and renters in country B would support trade liberalization. Now, on the other hand, the capital owners or providers and laborers/workers would be adversely impacted due to trade liberalization as the demand for these factor inputs would decrease among domestic firms or companies in country B due to import of the capital and labor-intensive goods and services through international trade providing justification for them to oppose trade liberalization.

Country C is relatively abundant in capital and labor compared to land implying that the country has a comparative advantage in the production of capital and labor-intensive goods and services relative to land-intensive products and services. Hence, country C would export capital and labor-intensive products and services and import land-intensive commodities and services implying that the demand for capital and labor would be relatively higher among the firms or companies in country C in comparison to land thereby economically benefitting capital owners or providers and laborers or workers and adversely impacting the landowners and renters in the factor or capital market in country C. Therefore, the landowners and renters in country C would oppose trade liberalization and the laborers/workers and capital owners or providers would support it on the contrary. The country D has a relative abundance in labor and scarcity in capital and land indicating that it would specialize more in producing labor-intensive products and services as compared to the capital and land-intensive products and services. Therefore, country D would export labor-intensive products and services and import capital and land-intensive goods and services. This would economically benefit the laborers or workers in country D and adversely affect the economic welfare of capital owners and landowners/renters in the country as the demand for labor would be higher among the firms or companies in the country compared to the land and capital thereby resulting in higher labor income or wage and a relatively lower capital and land income earned by domestic capital and landowners in country D. Hence, the laborers or workers in the country support international trade and in contrast, the landowners/renters and capital owners/renters would oppose it country D.

B. Considering diminishing exposure to international trade, as country A is comparatively scarce in labor than capital and land, most of the jobs and employment opportunities in the country would be concentrated in the agricultural and manufacturing sector which requires intensive use or employment of light and heavy machinery, industrial equipment, tools, etc. Therefore, there would be a sharp difference in the economic status between the laborers or workers and capital and landowners or renters in the country owing mainly to the difference in the respective factor or input demand and income in the country with capital and land having relatively higher demand and income compared to labor. Hence, it can be reasonably assumed that capital and landowners would have a strong political influence in the country through interest groups, legislative lobbies, pressure groups, and so on. Now, exactly, on the contrary, the laborers or workers in country D would have a higher economic status compared to the capital and landowners or renters signified by higher demand and income or wage for laborers or workers compared to the capital and landowners or renters as most of the jobs or employment opportunities would be concentrated on particularly labor-oriented industrial or manufacturing jobs in city areas and the agricultural activities in the rural areas in comparison to capital and land-intensive employments. Hence, the laborers or workers in country D would have relatively higher economic and political status and power compared to their landowner/renter and capital owner/renter counterparts. In the same line or argument, note that the landowners/renters in country C would earn lower factor income or return than the domestic laborers or workers and capital owners and renters considering the higher availability of jobs or employment opportunities for landowners/renters in comparison to the laborers or workers. Most of the jobs or employment opportunities would be concentrated in the agricultural sector in the country. The exact opposite scenario would be applicable in country  C with land scarcity and capital and labor abundance.