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Consider a country (Country A) producing Manufacturing goods (using Capital and Labor) and agriculture (using Land...

Consider a country (Country A) producing Manufacturing goods (using Capital and Labor) and agriculture (using Land and Labor) as in the Specific Factors Model. A sizeable portion of labor from this country leaves looking for better work.

a. Using a diagram show what happens to Manufacturing and agriculture output in the short-run in Country A?

b. Using a diagram show what happens to nominal and real wages and nominal and real rentals in Country A?

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Answer #1

a) In both sectors(goods) , relative price rises and relative qty falls due to fall in relative supply in country A.

b)Since relative prices (pc/pl) for manufacturing good rises , induces the economy to produce more manufacturing good . nominal rental rise while real rental is ambigous.(as price also rises).nominal wages will rise but real wages will fall.

Relative price of (pl/pla) for agriculture good rises , indudes landowners to rent out more land . nominal wages will rise but real wages will fall.

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