Question

Consider a specific factor model for a country whose manufacturing and agricultural sectors are characterized by the following production functions: Qm = K*Lm and Qa = (T)^0.5*(La)^0.5 where K and T stand for capital and land and Lm and La stand for the labour used in manufacturing and agricultural sectors respectively. Suppose the country has a comparative advantage in agricultural goods. Explain with the help of appropriate graphs what would happen to the real wage if the country opens up to trade.

Answer 1

The overall result is tha the real wage in terms of manufacturing rises and in terms of agriculture falls as it has a comparative advantage on agriculture.