Question

Consider the specific-Factors model with 2 goods (Cloth and Food) and three factors (mobile workers, land...

Consider the specific-Factors model with 2 goods (Cloth and Food) and three factors (mobile workers, land in food, and capital in cloth). Determine whether each statement is TRUE or FALSE and justify your answer:

When the economy opens to trade, labor gains relative to fixed capital.

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Answer #1

The correct answer is

False.

In the specific sector model, the clear winner is not factor based, but of industry based. The industry associated with the export sector wins and the import sector industry loses. Thus, we can say that it is ambiguous whether the labor, which is mobile, gains or loses with respect to the fixed capital, as both of them wins if they are associated with the export sector. Whether they gain more or less with respect to each other is not determined in this model.

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