Question: Consider a specific factor model, with two goods [X and Y], three inputs [land (T), capital (K), and labour (L)], and two countries, North and
Consider a specific factor model, with two goods [X and Y], three inputs [land (T), capital (K), and labour (L)], and two countries, North and South. X uses land and labour; Y uses labour and capital. South exports X and North exports Y. Preferences are identical and homothetic. Suppose that South gets more capital. (a) Use RS-RD curves to illustrate the effect on the world relative price of X. Do North's terms of trade improve or worsen? Why or why not (in terms of common sense)? (b) What happens to the real returns to land, labour and capital in each country
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