Q1. Assume that there are two countries: the US and South Korea; two goods: rice and cars; three production factors: land, capital and labor. Land is specific to rice, capital is specific to cars and workers can work in both industries. Use the framework of the specific factors model to answer the following.
Assume that, under autarky, rice is cheaper in South Korea than in the US. How does the price of rice in South Korea and the US change when South Korea opens up to international trade? How does this affect consumption and production of rice in South Korea? Explain.
Describe how the demand for the various factors of production change in South Korea after South Korea and the US open up to trade with each other.
Describe how the real wage of workers and the real returns of land and capital change in South Korea with trade liberalization. Explain your answer.
Q2. Consider trade between Germany and Nigeria. Germany is a (relatively) capital abundant country, and Nigeria is a (relatively) labor abundant country. There are two goods, a capital-intensive good automobile and a labor-intensive good clothing.
Following the Heckscher-Ohlin theory, describe the possible trade between the two countries? (their exports, their comparative advantage, etc.)
What does the Stolper-Samuelson theorem predict about the distribution implications of free trade. Discuss using the specific examples of the two countries and factors of production.
What does the factor-price equalization theorem predict? Discuss using the specific examples provided.
