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| Similar to Home in Problem 10, Foreign also produces computers and wheat using capital, which is specific to computers; land, which is specific to wheat; and labor, which is mobile between the two sectors. Foreign has 100 workers and 100 units of land, but only 10 units of capital. It has the same production functions as Home. a. Will the no-trade relative price of wheat be higher in Home or in Foreign? Explain why you expect this outcome. b. When trade is opened, what happens to the relative price of wheat in Foreign and to the relative price of wheat in Home? c. Based on your answer to (b), predict the effect of opening trade on the rental on land in each country, which is specific to wheat. What about the rental on capital, which is specific to computers? |
