How free trade impacts the equilibrium nominal wage rate

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Reference no: EM131001033

Suppose that in the United States corn production uses land and labor, while beer production uses capital and labor. Labor is mobile between the corn and beer industries, while land is specific to the corn industry and capital is specific to the beer industry. Consider that when the United States moves from autarky to free trade with the world there is a 10% decrease in the price of beer, with the price of corn remaining unchanged.

A) Using a labor market graph with an appropriately labelled x-axis, y-axis, and labor demand curve for each industry, clearly show and explain how free trade impacts the equilibrium nominal wage rate and number of workers employed in each industry in the United States.

B) Using a PPF graph (with beer production on the x-axis), clearly show and explain how free trade impacts the production of beer and production of corn in the United States.

C) Using a relative supply and relative demand graph for beer (in terms of corn) show the locations of the world relative supply and Home relative supply curves. Discuss whether Home will export or import (or neither) beer and corn.

D) Discuss the gains from moving from autarky to free trade for the United States in terms of: (1) the country overall; (2) labor; (3) capital; and (4) landowners.

Reference no: EM131001033

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