Predicting trade volume of services

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a) Consider the Specific Factors Model and suppose that land is specific to agriculture, capital is specific to manufacturing, and labour is mobile between sectors. The labour market is in equilibrium, i.e., the wage rate is the same in these two sectors. Then, a decrease in the price of manufacturing products (keeping the price of agricultural products constant), produces a shift of workers between sectors that leads to a decrease in Marginal Product of Labour (MPL) in the manufacturing sector. True or False? Explain

b) Consumers in a large economy are benefited by a tariff when the tariff improves the country's terms of trade. True or False? Explain.

c) The two key variables of the gravity model are countries' economic size and the geographical distance between trade partners. Although geographical distance between trade partners is associated with transportation costs, the gravity model is very effective in predicting trade volume of services between countries. True or False? Explain.

Reference no: EM132942658

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