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Q. Explain why price levels are lower in poorer countries.
Answer: One theory explicate the difference in prices on different endowments of capital and employment Bhagwait, Kravis, and Lipsey the clarification is as follows:• Rich countries have elevated capital-labor ratios while poor countries have a lot more labor relative to capital.• For the reason that rich countries have high capital-labor ratios the MPL is greater and therefore they have a higher wage.• Higher wages escort to higher disposable income and citizens' demand for goods will increase.• For the reason that labor is cheaper in poor countries and is used intensively in producing non-tradable goods and these non-tradable goods will be cheaper in the poor countries than in the rich countries.• The price of non-tradable goods will move with the increase in wages, therefore Increasing the price level of the goods.
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