Consider two countries: Home and Foreign. Before opening up to international trade, the price of mobile phone relative to bicycle is 1 in Home and 3 in Foreign. The production of both goods use labor and capital as the inputs. Suppose that labor is mobile across sectors, but capital is not mobile across sectors. (a) (3 points) Suppose these two countries open up to trade, and the world price of mobile phone relative to bicycle is 2. Explain the pattern of trade, and the pattern of production in the two countries under free trade. Is the pattern of production identical to that before opening up to trade? Explain your reasoning. (b) (7 points) Suppose the world price of mobile phone relative to bicycle changes from 2 to 1.5. What are the effects of this change in the relative price of mobile phone on the labor market in the two countries? Are Home workers better off? Are home capital owners better off? How about Foreign workers and Foreign capital owners? Explain your reasoning.

Consider two countries: Home and Foreign. The production of planes and furniture uses high-skilled labor and capital as inputs. Both high-skilled labor and capital are mobile across sectors. The production of planes is relatively capital intensive, and the production of furniture is relatively high-skilled labor intensive. Home is relatively more abundant in high-skilled labor, and Foreign is relatively more abundant in capital. (a) (3 points) Suppose these two countries open up to trade. Explain the pattern of trade, and the pattern of production in the two countries. Is the pattern of production identical to that before opening up to trade? Explain your reasoning. (b) (7 points) Suppose the world price of planes relative to furniture changes from 3 to 2. How are capital and labor reallocated across sectors in the two countries? Are Home workers better off? Are home capital owners better off? How about Foreign workers and Foreign capital owners? Explain your reasoning.