International Economics Questions

Consider a small country in a world that produces two goods, food and cloth. The relative price of food is lower in the country in autarky than it is in the global market. If the country removes its trade barriers what effect will this have on:

  1. The return to labor and the return to capital in the food and cloth sectors when all resources are specific to each sector? [5]
  2. The return to labor and the return to capital when labor is mobile between sectors but capital is specific to each sector [30]
  3. The output of food and cloth when labor is mobile between sectors but capital is not. [5]
  4. The return to labor and capital when both factors of production are inter-sectorally mobile. [10]

Use diagrams (and algebra if you wish) to support your answer.

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