Question

Suppose that hourly wages paid in the auto industry and produce (farm products) industries under competition and autarky are $30, and $18 respectively, in the context of this coverage, what can be said about labor in that country? Further, if in addition to labor, production of automobiles also requires capital but produce production requires land instead, if this country opens up to trade with another country producing both products, explain fully the distributional implications of trade in the first country, if it has a comparative advantage in produce production.

Answer 1

Since the country has comparative advantage in production of produce, then with opening up of economy and trading with another country, the production of farm products will increase. This will lead to increase in the demand of factors of production used for producing farm products. Thus, wages of labor employed in farm products will increase and returns of land owners will also increase. On the other hand, the wages of labor employed in automobile industry will fall and returns of capital owners will fall due to fall in production of automobiles and thus decline in the demand of factors of production employed in automobile industry.