If labor is immobile between two countries,changes in relative demand for goods and services may pose major economic problems

Question

Quizplus · Accepted Answer

When labor is immobile between two countries, changes in relative demand for goods and services can pose major economic problems when exchange rates are fixed. This is because in a fixed exchange rate system, if the relative demand for goods and services between two countries changes, prices must adjust to maintain balance of payments equilibrium. However, the prices of factors of production, including labor, cannot adjust in the short run, leading to a mismatch between relative demand and relative prices. In contrast, in a flexible exchange rate system, exchange rates can adjust to help rebalance relative prices and demand. Therefore, changes in relative demand for goods and services may still pose economic problems, but not as significant as they would be if labor were mobile.

If Labor Is Immobile Between Two Countries,changes in Relative Demand