Specific Factors Model of Trade
Businesses in Finland have made investments that have created stocks of capital that are devoted to either telecommunications (T) or business services (B).
a) Suppose that Finland is not trading. Draw the specific factors diagram for Finland, indicating how labor is divided between the two industries, and showing the prevailing wage wo.
b) Suppose before trade that the relative price of telecommunications to business services is 4 in Finland while the relative price for the rest of the world is 6. What do you predict about the world price of telecommunications to business services once trade starts?
c) Modify your diagram to show how Finland’s labor allocation and wage change when it opens trade with the rest of the world.
d) How does the opening of trade affect capital owners in Finland’s business services industry? Describe and show on your graph.
e) Can you predict whether Finnish workers are likely to benefit or lose from the opening of trade? Explain.
f) Suppose Finnish workers consume as much telecommunications as they can, while they buy very few business services. How does this affect the likely magnitude of worker gains or loses?
