Question

Suppose television production requires 20 units of labor and 4 units of land. Rice requires 1 unit of labor and 4 units of land.

1. If there is no trade, which good will be relatively cheaper in each country? If a free trade occurs, what will happen with relative prices of goods?
2. If a free trade occurs, What will happen with the factors prices? Does this happen in the real world? Explain why yes or why not.

Answer 1

both television and rice requires the same amount of land(4) but different units of labour(20 in the case of television vs 1 in the case of rice). hence rice production requires less amount of factors to produce hence rice will be cheaper.

if a trade happens the country will choose to export rice as it can produce it at a cheaper cost. hence the relative price of rice would increase(because computers will be produced at a cheaper cost somewhere else hence leading to lower the price of a computer).

if free trade occurs, the factor price of labour will fall as now only/mostly rice would be produced and it requires less labour. but this will attract the labours to migrate towards a country where they can earn a higher wage.

it sometimes happens in the real world where people migrate to other countries where they can find a higher income but it is not as smooth as the theory says because of the presence of immigration laws and the cost of shifting to a new country.

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