Opening and closing economies to trade inspires a lot of political controversy,

Question

Opening and closing economies to trade inspires a lot of political controversy, partly because change does not happen overnight. Consider the following scenario: At first, England and Portugal are closed to trade. Then, one day, bills are passed in both country’s legislatures that open the countries to trade with one another. What do you expect to happen over the next ten years to wine and cloth producers in both countries? Do you expect any groups to be angry? What kind of arguments will interest groups in both countries make? What about 50 years after the reform? Comment on the short and long run cost and benefits of trade.

Portugal wine=3 and cloth=1

England wine=4 and cloth=1

Explanation / Answer

Portugal has a comparative advantage in producing Wine with opportunity cost of wine =3 units of cloth while England has that at 4 units whereas England has comparative advantage in producing cloth with opportunity cost of producing cloth =0.25 units of wine while Portugal has that at 0.33 units so England will be Producing more of Clothes whereas Portugal will be producing Wine.

Since wine for england will be coming from Portugal and Cloth for Portugal will be coming from England hence Wine Producer in England and Cloth producer in Portugal will be angry

Interest group in both the countries will comment against the trade and say that it is hampering the growth of domestic producers and they are suffering because of that(Wine Producer in England and Cloth Producer in Portugal) and they will start pressurizing the government to put in tariffs for those imported goods or try to subsidize the domestic produce

Since Cloth making is capital intensive and wine making is labour intensive this will result in more of Cloth being make in England resulting into demand for capital and price of capital will increase in england whereas in Portugal increasing the production of wine increases the demand for and price of labor, and workers will gain at the expense of owners of Capital. After long time they will reach an equilibrium with certain proportion of each product will be produced in both the countries.

In short term cost will decrease for wine in England whereas will increase for Cloth(As its being exported)and for portugal cost will decrease for cloth and increase for wine and in Long term both will reach an equilibrium state with no major price changes and no more capital deepening in england and lesser pay increase in Portugal. Benefits of trade will be lesser cost for both the countries.

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