Assignment Task: Assume there are two countries in the world called North and South each producing output using a combination of capital and labor with a uniform production function. Each country begins with equal endowments of capital and labor. There is free movement of labor between North and South but capital is strictly immobile. Under classical assumptions, sketch the relevant factor markets for each country and how they might change under given conditions. Explain the process and outcomes in each country as fully as you can.
1. Through a sudden increase in the birth rate, 20 years prior, the labor force in North doubles.
i. What happens to real wages in the North and in the South?
ii. What happens to the real return on capital in the North and in the South?
iii. Which groups are better/worse off in both North and South after this development?
2) Now suppose instead that a flood in the North wipes out half the capital stock there but does not kill any labor. Again, labor is mobile between countries, but capital is not.
i. What happens to the real wage in the North and in the South?
ii. What happens to the real rental in the North? What about the South?
iii. Which groups are better/worse off in both North and South after this development?