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Ch. 9 Problems

Ch. 9 Problems - Problem 2 • Research by David M Gould...

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Chapter 9 Problems 1 and 2
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Problem 1 Suppose that factor-price equalization prevails in the world but a large migration takes place from country A to country B (due to some political disturbances). Describe the adjustments that will occur if capital is also mobile internationally. What will happen if it is immobile?
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Problem 1 Answer The migration in labor from country A to B will make country B more labor abundant, and A less labor abundant. Therefore, the wage-rental ratio will fall in B and rise in A. If capital is internationally mobile, then capital also moves abroad with labor until the wage- rental ratio is equal across countries. If capital is not internationally mobile, then country B will produce more labor-intensive goods and country A will produce more capital-intensive goods. Country A will export some of the capital-intensive goods to country B in return for their excess labor-intensive goods.
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