Consider an economy with two sectors: agriculture and production of fidget spinners. There are two factors...

Consider an economy with two sectors: agriculture and production of fidget spinners. There are two factors used in the production of both industries: labor, mobile between the industries, land specific to agricultural production and capital specific to the production of fidget spinners. This economy is involved international trade andworkers spend most of their earnings on agricultural products. Now assume that the world price of agricultural products decreases and price of fidget spinners does not change, then

A. Nominal wage of workers will fall, real wage will rise

B. Nominal wage of workers will fall, real wage will fall

C. Both nominal and real wages of workers will rise

D. Both nominal and real wages of workers will fall

Solutions

Expert Solution

Option A is correct.

This is because that less workers would now be hired on the agricultural land due to decrease in the price of their produce. Since the price of spinner is the same, no change in labour hirings. Ultimately there is unemployment and the nominal wages would fall. real wage, which is nominal wage divided by price would rise, because the price has reduced.

Rahul Sunny answered 1 year ago

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