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Consider the Speci?c Factors Model for a small open economy that produces only agricultural goods (A) and manufacturing goods (M)

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Consider the Speci?c Factors Model for a small open economy that produces only agricultural goods (A) and manufacturing goods (M). Assume that the production of agricultural goods depends on the use of land and labor, while the production of manufacturing goods depends on capital and labor and that the economy initially exports agricultural goods. 3) Assume that due to a natural disaster, %20 of the land employed in the agricultural sector is destroyed (Hint: This will affect the marginal product of labor in the agricultural sector). At the same time, the prices of manufacturing goods fall by %20 while the prices of agricultural goods stay constant. Use the labor allocation diagram to analyze the effects of these changes on the allocation of labor between the two sectors as well as the effect on the nominal wage. b) Use the PPF diagram to show the effects of ONLY destruction of %20 of the land employed in the agricultural sector on the level of output and export of agricultural goods in the international trade market. |