Question

3. (8 points) Consider a small open economy in the Specific-Factors model with 2 goods (C and F) and three factors (mobile labor, fixed capital in C, and fixed land in F). Except otherwise noted, assume that every factor has the same preferences for C and F. Under free trade, the economy exports F. (a) As the home country opens up from autarky to trade, the opportunity cost of F in terms of C remains the same. (b) Suppose landowners only consume cloth. If the amount of capital in C increases, the real income of landowners falls, but the less so if world prices change in response to the capital increase. (c) When the economy opens to trade, labor loses relative to capital in C (d) If the country is large, it is possible to make every agent in the economy better off by imposing a subsidy to the exports of food and some redistribution scheme.

True or False, only answer part c is fine

Answer 1

Answer : c) The answer is True.

Based on given information, as labor is mobile hence when the economy open trade then labor can move to other countries to get higher income. In this situation, the small open economy lose labors. As capital is fixed in C, hence the economy is losing labors relative to capital for good C. Therefore, the given statement is true.