Reference no: EM133552328

Assume Country X can produce 2 goods TVs and timber furniture using unskilled labour (L) that is mobile between sectors. Capital (K) is specific to producing TVs. Land (T) isspecific to producing timber furniture.

Question a. Use a single diagram to show how Country X's labour (L) is allocated between TVs and timber furniture. This is the combined graph with the wage curves for each sector. Hint: The graph should represent both wages which are a function of MPL and prices.

Now assume Country X engages in free trade, and in the world market the price of timber furniture is 20% higher than in Country X, while the price of TVs does not change.

Question b. Redraw the diagram in point (a) and let the price of timber furniture increase by 20%. What happens to the labour demand curves in the TVs sector and in the timber furniture sector?

Question c. What happens to equilibrium wages and the allocation of labour. Briefly explain your answer.

Question d. Who wins and who loses in Country X after opening to trade? Briefly explain your answer.

Question e. Search for a news article online. The article should be about a sector or industry within a country that has been (or could be) negatively affected by the decision of the country to open to free trade. Old and recent articles are accepted. Can the Specific Factors Model be used to explain the situation described in the article? Explain your answer in no more than 150 words. Please clearly reference the article you chose.