Question

In the (Standard) SpecificFactors Model of a small open economy that initially exports good X, analyze the effects on the quantity of X exported due to the following changes (one at a time): a. A fall in the price of good Y, holding the price of good X constant. b. An increase in the size of the labor force c. Destruction of a part of the capital stock employed in the Y industry

Answer 1

Part A

The fall in price of good Y causes the Y industry's value of marginal product of labor curve, VMPLY=pYMPLY, to move down, as demonstrated as follows.labor market equilibrium is found at a lower nominal wage, w', with an expansion in the measure of labor employed in the X industry and a decreasing in LY. In this manner, the output of X rises and the output of Y falls, moving the nation down and to the right of its PPF.

The effect on the real wage is equivocal. It has fallen in nominal terms and consequently concerning the price of X, which has not changed. In any case, the price of Y has fallen, and the wage would have fallen to w0 appeared beneath to rise to that fall in price (since that is the sum that the pyMPLY bend has fallen), and it has not done that. So w/pX is down. However, w/py is up.

Nominal payment to capital in the X industry has expanded since the expansion in LX expands capital's marginal product (or note the expanded territory underneath VMPLX above w'). Since pX is unaltered and pY has fallen, this is a real increase.

WX w! wo PyMPly Px MPix Py'MPly OX Lx Lx'

Part B

This extends the diagram horizontally since its even measurement is the work enrichment. It is drawn underneath keeping the OX starting point fixed and hence moving to the privilege both the right-side vertical hub and the VMPLY curve since that is attracted concerning that pivot. The outcome is that the crossing point with the unaltered VMPLX curve likewise moves right, yet not to such an extent, and happens at a lower w.

This fall in the wage, holding prices and capital stocks fixed, requires a fall in the marginal product of labor and accordingly that employment grows in both industries. Accordingly, output ascends in the two industries. The fall in the wage is a real decay, since the two prices are fixed. What is more, the expanded employment increases the profits to capital in the two segments, additionally in real terms since prices are fixed.

Wy Wy PyMPly Px MPIX Py'MPly Lx Lx' Oy Oy

Part C

This diminishes the marginal product of labor in the Y business, moving the VMPLY curve down. The labor market chart looks equivalent to some extent (an), aside from that the curve has moved because of changing the MPLY function as opposed to evolving pY. This time, in any case, the PPF is contracted inward, since less of Y (however not X) can be produced. From the labor market graph, we see again that since LX expands, the output of X rises. The output of Y falls, obviously, both because of the loss of capital and afterwards additionally due to the fall in LY as work likewise leaves the industry. The real wage falls because the nominal wage falls and costs have not changed.

Capital that gets by in the Y segment gains; however, this is somewhat difficult to see. Since w has fallen with no change in pY, MPLY more likely than not fallen. However, the marginal product relies upon the ratio of capital to labor, so KY/LY more likely than not fallen. This, in turn, implies MPKY more likely than not risen, and along these lines that rY has gone up. Since pX is likewise unaltered, this is a real increase. This time we can say what happens to export. The falling income diminishes consumption of X (if X is normal), while the output of X has expanded along these lines export of X rise.

WX PyMPly Px MPix Py'MPly OX Lx Lx'