Suppose the world price of cotton falls substantially. The demand for labor among cotton-producing firms in Texas willdecrease . The demand for labor among textile-producing firms in South Carolina, for which cotton is an input, willdecrease . The temporary unemployment resulting from such sectoral shifts in the economy is best described asfrictional unemployment.

Decrease

Increase

Frictional unemployment.

Explanation:

If the world price of cotton falls considerably, the cotton producing firms will not be able to make the expected level of revenue they have initially projected, this fall in revenue will lead to the firm requiring less labor, therefore there will be a decrease in demand for labour.

However, textile producing firms in South Carolina will see this fall in price as an opportunity to purchase as much cotton as possible, this will therefore lead to the firms needing more labor to work with the large number of inputs purchased. This will therefore, lead to an increase in the demand for labor.

The resulting consequence will therefore be Frictional Unemployment, which is the time spent between jobs by the labor. It results from transferring from the cotton producing firms, to the textile producing firms.

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