Consider two countries, Spain and Colombia. Both countries produce the same homogeneous good and use the same technology Y = K1/2 . Lª/2. The only difference between them is that Spain is relatively more abundant in capital than Colombia. Suppose that initially Ls = 4, Lc = 4, Ks = 16 and Kc= 1. 2. (a) Compute the wage rate and the rental price of capital in Spain and Colombia, assuming there is NO factor mobility. Compare the wage rate and the rental price of capital across countries. By the way, note that since there is only one good, the difference between real and nominal does not matter. (b) Now allow for migration (labor mobility), but not for capital mobility. Compute the number of workers in equilibrium in each country, and compare your findings to the initial situation. (c) Compute the new wage rate and the new rental price of capital in each country. Who gains and who loses in Spain? (d) Show that global economic efficiency increases, i.e., the world production goes up compared to the situation with no labor mobility. (e) Show that the "original" residents of Spain gain, i.e., the gains of those who gain in Spain more than compensates the loss of those who lose.

Consider two countries, Spain and Colombia. Both countries produce the same homogeneous good and use the same technology Y = K1/2 . Lª/2. The only difference between them is that Spain is relatively more abundant in capital than Colombia. Suppose that initially Ls = 4, Lc = 4, Ks = 16 and Kc= 1. 2. (a) Compute the wage rate and the rental price of capital in Spain and Colombia, assuming there is NO factor mobility. Compare the wage rate and the rental price of capital across countries. By the way, note that since there is only one good, the difference between real and nominal does not matter. (b) Now allow for migration (labor mobility), but not for capital mobility. Compute the number of workers in equilibrium in each country, and compare your findings to the initial situation. (c) Compute the new wage rate and the new rental price of capital in each country. Who gains and who loses in Spain? (d) Show that global economic efficiency increases, i.e., the world production goes up compared to the situation with no labor mobility. (e) Show that the "original" residents of Spain gain, i.e., the gains of those who gain in Spain more than compensates the loss of those who lose.

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter21: Costs And The Supply Of Goods

Section: Chapter Questions

Problem 12CQ

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