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. Which of the following is most likely to happen in the short run following the opening of free trade between the countries?
A)All the workers in both the countries will gain while all the land owners in both the countries will lose.
B)All the workers in both countries will lose while all the land owners in both the countries will gain.
C)The workers and land owners in the food industry in Beta will gain while the workers and the landowners in the drink industry will lose.
D)The workers and the land owners in the food industry in Alpha will gain while the workers and the landowners in the drink industry will lose.

Question

Quizplus · Accepted Answer

In the standard trade model, when trade opens, each country specializes in producing the good for which it has a comparative advantage. Alpha, being labor-abundant, will specialize in producing the labor-intensive good (drink), and Beta, being relatively land-abundant by implication, will specialize in producing the land-intensive good (food). Therefore, in Beta, the food industry (land-intensive) will expand, benefiting workers and landowners in that sector, while the drink industry (labor-intensive) will contract, leading to losses for workers and landowners in that sector.

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