Question

Assuming a two country, two good, perfect competition model of trade with multiple factors, and mobile labor but specific other factors. Suppose that country finds that with trade the relative price of one of the goods it produces, say machines, has decreased. If machines are produced using capital and labor, and the other good, textiles are produced using land and labor. Explain clearly what happens to the fortunes of these four groups as a result of trade: Owners of labor employed in textiles, owners of labor employed in machines, owners of land, and owners of capital. Which of these groups, if at all any, would be opposed to trade?

Answer 1

Due to fall in the relative price of machines, the production of machines will fall. The fall in the production of machines will lead to fall in the labor and capital employed in machine production. Thus, wage rate of owners of labor employed in machines will fall and also return of owners of capital will also fall. On the other hand, since price of textile will increase, this will lead to increased production of textiles and more and more workers and land will be employed in textile production. Thus, demand for labor employed in textiles and land used for textile production will increase. Thus, wages of the workers in textile production will increase and return of owners of land will also increase.

Thus, labor employed in machine production and owners of capital will see a fall in their profits and thus oppose to trade.