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On 21 August 2021, the Caribbean island country Haiti was hit by a 7.2 magnitude earthquake. The earthquake destroyed houses and factories in the country, effectively reducing the amount of capital in the economy. For this exercise, we will assume that Haiti's economy consists of two sectors, the manufacturing sector which uses labour and capital, and the tourism sector, which uses labour and land. As we focus on the short-run effects, we will use the specific factors model, i.e., capital can only be used in the manufacturing sector, and land can only be used in the tourism sector. Workers can move between the two sectors.
What is the short-run impact of the reduction in Haiti's capital stock on the wages paid to workers in the economy?
What is the impact on the output of the manufacturing and the tourism sector? Illustrate using suitable graphs.
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