2. Specic Factors Model {.20 points in total) Given is a. small open economy that produces food and cloth with one mobile (labour) and two specic factors. The Specic factors are land, used in food production, and capital, used in cloth production. Initially, the country exports cloths. [a] What are the two main reasons why international trade has strong effects on the income distribution? Which of those reasons can be modelled in Ricardo's model? Which one in the specic factors model? (4 points) (b) Assume that the price of cloth (PC) decreases by 10% while the price of food remains constant. Explain with he help of the gures below how's.r this affects nominal wages, output of both goods, employment in both sectors and the welfare of workers, landlords and capital owners. (8 points) wage, or 9 Output of food. OF Q: mount of cloth. 0.: [0) Assume now that the labor force of this country decreases, but the nal goods prices do not change. Show with the help of the gures below how this aects the nominal wage rate, output of both goods, Imployment in both sectors and the welfare of workers, landlords and capital owners. (Hint: On which axis is the labor force denoted? How dees a decrease of the labor force affect this axis?) {6' points) 5'0\" = 'Po'Pr wage, in 9 Output offend. 0|: oc Output of cloth. 0.: (d) How do economists assess whether a. society as a. whole is better or nurse of due to interna- tional trade? {2 points)