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Assume Home produces 2 goods, clothing (C) and food (F)
Assume Home produces 2 goods, clothing (C) and food (F). Clothing is produced using labor (L) and capital (K), while food is produced using labor (L) and land (T). The total supply of labor, capital, and land are 1,200, 1,000, and 1,600, respectively. Labor is mobile across sectors. All markets are competitive. Home's production functions for clothing and food are given by:QC = LC K1/3 2/3
QF = LF T1/2 1/2
Now suppose there is another country, Foreign, which has a larger supply of clothing than Home. Home and Foreign open up to free trade.
a. Describe the trade pattern between Home and Foreign.
b. What is the effect of trade on Home's relative price of clothing?
c. Show graphically how labor allocation and wage respond to free trade in Home.
d. Describe the income effects of trade in this example (Who will gain and who will lose?).
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