Question 3: International Factor Mobility Assume that Westeros is a small open economy producing manufacturing (M) and agricultural (A) goods. For exogenous rea- sons, Westeros is experiencing out-migration, i.e. workers are leaving the country to work elsewhere, while there is no effect on capital. As a result, the labour endowment of Westeros, L is decreasing. (a) First, analyze the effects in the short run. Consider the Specific Factors Model with three factors: Labor (L) is the mobile factor, capital (K) is specific to the manufacturing sector, and land (T) is specific to the agricultural sector. Determine is the impact of out-migration on the following outcomes. Make sure to show each step of your derivation. (i) w/Px;w/PA (i) w/PA (ii) LM (iv) LA (u) QA (vi) QM where w is the wage rate, Lm is the amount of labour in the manufacturing sector, LA is the amount of labour in the agricultural sector, Py is the price of manufacturing goods and PA is the price of agricultural goods. (10) (b) Suppose the out-migration continued for ten years with no other change in the econ- omy. Suppose there are two factors of production, K and L, where manufacturing is relatively capital intensive and agriculture is relatively labour intensive. Factors of production are perfectly mobile across industries. What are the impacts of out- migration on the outcomes (i) to (vi) listed above? Discuss based on the appropriate theorems. (10) Question 3: International Factor Mobility Assume that Westeros is a small open economy producing manufacturing (M) and agricultural (A) goods. For exogenous rea- sons, Westeros is experiencing out-migration, i.e. workers are leaving the country to work elsewhere, while there is no effect on capital. As a result, the labour endowment of Westeros, L is decreasing. (a) First, analyze the effects in the short run. Consider the Specific Factors Model with three factors: Labor (L) is the mobile factor, capital (K) is specific to the manufacturing sector, and land (T) is specific to the agricultural sector. Determine is the impact of out-migration on the following outcomes. Make sure to show each step of your derivation. (i) w/Px;w/PA (i) w/PA (ii) LM (iv) LA (u) QA (vi) QM where w is the wage rate, Lm is the amount of labour in the manufacturing sector, LA is the amount of labour in the agricultural sector, Py is the price of manufacturing goods and PA is the price of agricultural goods. (10) (b) Suppose the out-migration continued for ten years with no other change in the econ- omy. Suppose there are two factors of production, K and L, where manufacturing is relatively capital intensive and agriculture is relatively labour intensive. Factors of production are perfectly mobile across industries. What are the impacts of out- migration on the outcomes (i) to (vi) listed above? Discuss based on the appropriate theorems
