1. Business
  2. Economics
  3. sudden stops and the ppf suppose the production functions for...

Question: sudden stops and the ppf suppose the production functions for...

Question details

3. Sudden stops and the PPF Suppose the production functions for tradable and non-tradable goods are given below. NT 2VL Labor is perfectly mobile across sectors and the wage rate equals 1/4 in this economy. The labor market size is 20 employees. The price of tradables and non-tradables are the same and equal to 1. a) How many workers does each sector employ? Show that the non-tradable sector employs more workers. b) Now suppose the economy suffers a sudden stop. This forces more workers to be displaced from the non-tradable to the tradable sector. Suppose, the economy now has 10 workers in each sector. What are the prices in each sector, if the wage rate does not change? c) What happens to the relative price of non-tradables with respect to tradables PNT PT Does it increase or decrease from the initial relative price of 1? d) In the light of what you know about sudden stops, do you find your result in c) surprising?

Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution