Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. If the countries engage in free trade, the price of food will:
A)rise in Alpha and fall in Beta.
B)rise in both the countries.
C)fall in both the countries.
D)fall in Alpha and rise in Beta.

Question

Quizplus · Accepted Answer

In the standard trade model, a country will export the good for which it has a comparative advantage. Alpha, being labor-abundant, will have a comparative advantage in producing the labor-intensive good, which is drink. As Alpha exports more drink, it will produce less food, leading to a higher price for food in Alpha. Conversely, Beta, trading with Alpha, will import drink and export food, increasing its food production and thus lowering the price of food in Beta.

Assume the Standard Trade Model with Two Countries (Alpha and Beta)