Question

Suppose the world price of cotton falls. The demand for labor among cotton-producing firms in Texas will (increase/decrease) . The demand for labor among textile-producing firms in South Carolina, for which cotton is an input will (increase/decrease) . Both workers and firms will need some time to adjust to the new conditions. The unemployment resulting from such sectoral shifts in the economy is best described as ( structural/cyclical/frictional/seasonal)

Answer 1

If the world price of cotton falls, firms will be less willing to supply cotton. Therefore, fewer cotton firms may open, or few people will be employed in the cotton-producing industry; therefore, the demand for labour for cotton-producing firms in South Carolina will decrease.

Since the world price of cotton falls, a textile-producing firm in South Carolina which uses cotton as only one aspect of their textiles, textile firms can buy more cotton since it's cheaper and will reduce costs. Since this is the case, the demand for cotton will increase. Because of this, more textiles need to be made, and so the demand for labour increases as a result.

The unemployment resulting from such sectoral shifts in the economy is best described as structural since demand for labour is decreasing in the primary sector and increasing in the secondary sector of the industry.