Suppose that land is specific to agriculture, capital is specific to manufacturing, and labor is mobile...

Suppose that land is specific to agriculture, capital is specific to manufacturing, and labor is mobile between sectors. If you know that the nominal rental of capital and labor in manufacturing has fallen, then what can you say about the changes in the prices of manufactured goods and agricultural goods?

Expert Solution

It has been stated that capital is specific to manufacturing. It has also been provided that nominal rental of capital has fallen. The reason behind this fall in nominal rental capital would be the fall in demand for capital in manufacturing sector owing to lack of demand for manufactured goods.

This lack of demand would in result will lead to fall in prices of manufactured goods. Another reason would be the increase in nominal price of agricultural goods.

Labor is a mobile factor that is used in both agricultural as well as manufacturing sector.

So, decrease in nominal income of labor implies fall in demand for labor in either agricultural sector or manufacturing sector or both. This would be due to decrease in demand for either manufactured goods or agricultural goods or both.

In such case, prices of both manufactured goods and agricultural goods or one of them would have decreased.

Price of agricultural goods cannot increase or decrease at the same time.

So, the given scenario is consistent with the fall in price of manufactured goods.

Thus, the price of manufactured goods has decreased while there is no change in price of agricultural goods.

Rahul Sunny answered 2 years ago

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