Rice is a land-intensive product, requiring 2 unit of labor and 4 units of land for every unit of rice produced. Home has a comparative advantage in rice. Graph the lines along which price equals production costs for rice and for TVs. Equilibrium output is at the point where the initial isovalue line is tangent to the production frontier. The terms of trade at this point are equal to 2.
Home enjoys gains from trade.
Suppose the world consists of two countries, Home and Foreign, each of which have two factors of production, capital and labor, and produce only one good, food. Consequently, trade is limited to the movement of capital between the two countries. Assume that capital in Home in Foreign is equal and Foreign has more labor than Home. Explain the effects of capital migration on output and the income of workers and capitalists in each country.