10 The Specific Factors Model, Part 2

10 The Specific Factors Model, Part 2 - The Specific...

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1 1 The Specific Factors Model, Part 2 3. An Autarky Economy Changes in Absolute and Relative Prices 4. A Trading Economy Relative Supply and Demand –T h e G a i n s f r o m T r a d e Trade and the Distribution of Income 2 Changes in Prices • What happens to the allocation of labor and the distribution of income when there is: – An Equal Proportional Change in Prices? – A Change in Relative Prices? 3 Changes in Prices
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2 5 Changes in Prices 0 F VMPL M , W M VMPL F , W F 0 M P M * MPL M P F * MPL F W M0 W F0 L M0 , L F0 6 Changes in Prices • A Change in Relative Prices: – Suppose that the price of manufactures increases by 10% but the price of food does not change. 7 Changes in Prices 0 F VMPL M , W M VMPL F , W F 0 M P M * MPL M P F * MPL F W M0 W F0 L M0 , L F0 8 Changes in Prices Q M Q F Q M0 Q F0 A Slope = - (P M / P F ) 0
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3 9 A Trading Economy • For trade to take place, the 2 countries must
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10 The Specific Factors Model, Part 2 - The Specific...

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