Question

Assume the standard trade model with two countries (Alpha and Beta), two goods (food and drink), and two factors of production (land and labor). Further assume that Alpha is relatively labor-abundant and drink is relatively labor-intensive. If the countries engage in free trade, the price of food will:

Answer 1

Answer:

the price of food will fall in Alpha and rise in Beta

Explanation:

Based on the information provided within the question it can be said that in this scenario If the countries engage in free trade, the price of food will fall in Alpha and rise in Beta. This is mainly due to the fact that Alpha has a comparative advantage in drinks but not food due to drinks being labor intensive and Alpha having enough laborers to handle it. Therefore Beta will most likely trade their food for drinks causing prices of food to rise in Beta.