Specific factors model: there are two countries, Spain and Mongolia. Two goods are produced: cars and pants.
Question:
Specific factors model: there are two countries, Spain and Mongolia. Two goods are produced: cars and pants. Pants are produced using labour and land, while cars are produced using labour and capital. Spain, compared to Mongolia, is relatively abundant in capital. Describe everything in terms of cars.
a) Draw the RS-RD diagram, making sure to clearly show each country's RS curve and labelling each country's pre-trade relative price of cars and the post-trade relative price of cars. Explain briefly what happens to the relative price of cars in Spain after trade, and why.
b) Using a labour allocation diagram, explain what happens in Spain when it opens up to trade with Mongolia to: labour allocation, nominal wages, real wages.
c) Using the appropriate diagram, explain whether landowners are better off after trade in Mongolia.
d) Assume that Spain and Mongolia are opened to trade with each other. Suddenly, Mongolia receives an increase to the amount of capital it owns. Draw a labour allocation diagram and an RS-RD diagram to illustrate how the post-trade equilibrium (since Spain and Mongolia remain open to trade with each other before and after the capital increase) changes, in terms of the relative price of cars. Explain also what happens to labour allocation, real wages, nominal wages in Spain. You may assume that the pattern of specialization remains unchanged before and after the capital increase (i.e. if Spain specialized in making cars before the capital increase in Mongolia, it still specializes in cars afterwards).
Expert Answer:
Lets break down each part of the question a Relative SupplyRelative Demand RSRD Diagram In the RSRD ... View the full answer
