Question

Suppose two countries are considering a new agricultural trade agreement with each other. Country A has abundant low-skill labor and scarce land. Country B has abundant arable land but little population. In which country do land owners support a trade agreement? In which country do workers support a trade agreement?

Short answer

Landowners support a trade agreement in country B, while workers support it in country A.

Step-by-step solution

Understand the Context

We have two countries: Country A and Country B. Country A has plenty of low-skill labor but limited land, while Country B has plenty of land but a small population. The trade agreement is likely to shift resources and income between landowners and workers differently in each country depending on their abundancy.

Determine Gains for Landowners

In country B, land is abundant, so the price of land is relatively low. If trade is allowed, country B can export agricultural products, increasing demand for land. This increases the price and the rental income for landowners in country B. Conversely, in Country A, since land is scarce, increased exports or markets won’t drastically change land income within A.

Determine Gains for Workers

In country A, labor is abundant, making labor costs lower. With trade, Country A can export labor-intensive goods, potentially increasing wages and employment opportunities for its workers. In country B, where labor is scarce, trade might increase import of labor-intensive goods, possibly hurting local workers due to increased competition.

Conclusion

In country B, landowners benefit from higher demand for land due to trade agreement. In country A, workers gain from increased market access for labor-intensive goods, increasing employment and potentially raising wages.

Key concepts

Comparative Advantage

In the realm of international trade, comparative advantage is a concept introduced by the economist David Ricardo. This idea emphasizes that countries should specialize in producing goods for which they have the lowest opportunity cost, even if they are not the most efficient at producing them in absolute terms.

When we examine Country A and Country B from the exercise, we see this concept in action. Country A, with its abundant low-skill labor, can produce goods that require more human effort efficiently, while Country B, with its lush arable land, excels in agricultural products that need space and soil richness.

By specializing and trading, each country can benefit more than if they tried to produce everything on their own. Thus, through the lens of comparative advantage, we understand why such trade agreements are beneficial. Each country leverages its natural strengths to return greater gains through international exchanges.

• Specialization based on comparative advantage leads to increased overall efficiency.
• Even less efficient countries in absolute terms can shine by focusing on their relative strengths.

Factor Endowments

Factor endowments refer to the natural resources, labor force, capital, and technology that a country possesses. These endowments dictate what a country can produce cheaply and efficiently.

In our exercise, Country A has a significant amount of low-skill labor but not much land. On the other hand, Country B is rich in arable land but lacks population density. These differences in factor endowments lead to each country's strengths in production and lay the foundation for trade agreements.

When countries engage in trade based on their factor endowments, they capitalize on their capabilities, maximizing production potential.

• Country A benefits from exporting labor-intensive goods due to its abundant workforce.
• Country B can focus on exporting land-intensive agricultural products.

Trade Agreement

A trade agreement is a pact between two or more nations to reduce barriers to imports and exports among them. These agreements can lead to significant economic benefits by opening up markets and increasing trade flows.

In the scenario given, a trade agreement between Country A and B impacts different economic groups within these countries due to their unique factor endowments.

Landowners in Country B support the trade agreement because it raises demand for their plentiful arable land, driving up its value. Meanwhile, workers in Country A favor the deal since it opens more markets for labor-intensive goods, potentially boosting employment and wages.

• Trade agreements can alter income distribution within a country.
• They facilitate economic growth by aligning each country's production strengths.