Suppose that the home country in the two-sector (manufacturing and agriculture) specific-factors model has a comparative advantage in manufactured 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 worse off because the nominal wage decreases.
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, workers in the manufacturing sector will benefit from trade liberalization due to the increase in demand for manufacturing goods. This increase in demand will raise the nominal wage in the manufacturing sector. However, since there is a fixed amount of capital, the increase in demand for manufacturing goods will lead to a decrease in demand for agricultural goods. This decrease in demand will lead to a decrease in the price of the agricultural good, leading to a fall in the real wage in terms of the manufactured good. Therefore, workers will be better off in terms of the nominal wage but worse off in terms of the real wage in terms of the manufactured good. On the other hand, the real wage in terms of the agricultural good will rise due to the decrease in the price of agricultural goods, so workers in the agricultural sector may be better off or worse off depending on the magnitude of the price change.

Suppose That the Home Country in the Two-Sector (Manufacturing and Agriculture)