Specific factors of production

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Suppose two countries, Portugal and Spain, each produce flowers and clocks. Assume that land is an input specific to flowers and capital is an input specific to clocks. Labor is free to move between the two industries within in each country. When trade occurs, the price of clocks increases and the price of flowers is unchanged in Portugal. In Spain, the price of clocks decreases and the price of flowers is unchanged.

a. In Portugal, derive what happens to the nominal rental payments on capital and land. Next, extend the derivation to show what happens to the real rental on capital and land.

b. Repeat the process in part (a) for Spain.

c. Verbally (no equations) generalize the real effects on the specific factors of production based on whether the good in that industry is imported or exported when trade is opened. This only needs to be one or two sentences.

Reference no: EM131805650

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