In the two-sector (manufacturing and agriculture) specific-factors model, suppose that a country has a comparative advantage in manufacturing output. Will workers be better or worse off following the opening of trade with other countries?
A) Workers will be better off because the nominal wage increases.
B) Workers will be better off because both nominal and real wages increase.
C) Workers may be better off or worse off because the real wage in terms of the agricultural good rises and the real wage in terms of the manufactured good falls.
D) Workers may be better off or worse off because the real wage in terms of the agricultural good falls and the real wage in terms of the manufactured good rises.

Question

Quizplus · Accepted Answer

In the specific-factors model, the opening of trade leads to the reallocation of resources from the sector in which the country has a comparative disadvantage to the sector in which the country has a comparative advantage. This leads to an increase in the relative price of the manufactured good and a decrease in the relative price of the agricultural good. As a result, the real wage in terms of the agricultural good rises and the real wage in terms of the manufactured good falls. Therefore, workers in the manufacturing sector may be worse off, while workers in the agricultural sector may be better off. Overall, it is uncertain whether workers will be better or worse off following the opening of trade.

In the Two-Sector (Manufacturing and Agriculture) Specific-Factors Model, Suppose That