Suppose two countries, India and China, produce two goods: transport
equipment and pharmaceutical products. Suppose, India and China have
identical technologies to produce transport equipment and pharmaceutical
products. Assume that land is specific to transport equipment, capital is specific
to pharmaceutical products, and labor is free to move between the two industries.
India and China engage in free trade, the relative price of pharmaceuticals
falls in India and the relative price of transport equipment falls in China.
In a graph, show how the wage changes in India due to a fall in the price of
pharmaceuticals, holding constant the price of transport equipment. Can we
predict that change in the real wage?
AXhat is the impact of opening trade on the rentals on capital and land in
India? Can we predict the change in the real rental rates (returns) on capital
and land?
