3. Specific Factors Model (17.5%) Given is a small open economy that produces food and cloth with one mobile (labor) and

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3 Specific Factors Model 17 5 Given Is A Small Open Economy That Produces Food And Cloth With One Mobile Labor And 1 (81.23 KiB) Viewed 14 times

3. Specific Factors Model (17.5%) Given is a small open economy that produces food and cloth with one mobile (labor) and two specific factors. The specific factors are land, used in food production, and capital, used in cloth production. Initially, the country exports cloths. slope --PJP XS P, MP4 PAMPLE QC Output of cloth, QC LI a.) Assume the price of cloth increases by 10% while the price of food remains un- changed. Draw the effects of this relative price change into the figures above. What will happen to the output of food and cloth? What will happen to the nominal wage rate (w)? b.) Describe the welfare effects caused by the change in relative final good prices for land- and capital owners as well as for workers. c.) Assume now that due to climate change the land of this country gets less productive (effectively the amount of available land has decreased). Show in the figures below how this affects the wage rate and output in both sectors as well as the production possibilities of that economy. d.) Discuss the effects of climate change on the welfare of workers, land- and capital owners. slope = -P/P x P.MP4 PMPLE Qc Output of cloth, OC