10 Specific Factors

Question 1

Specific factors model

Answer 1

• Two products and two inputs (e.g. labor and capital)
• One or both of the inputs cannot move across sectors
  
  • Both: Pure specific factors model
  • One: Mixed specific factors model (Ricardo-Viner model)

Question 2

How can factors be specific to the industry?

Answer 2

• Short-run focus
• Barriers to mobility (geographic, technological, regulatory)

Question 3

Average US tariffs (1790 - 1840)

Answer 3

Question 4

In a Ricardian-type, comparative-advantage economy, there’d be no conflict over trade policy. Conflict can then be understood as a result of _____

Answer 4

In a Ricardian-type, comparative-advantage economy, there’d be no conflict over trade policy. Conflict can then be understood as a result of specific factors.

• 􏰀 Specific factors in North (manufacturing) gain from tariff.
• 􏰀 Specific factors in South (agriculture) loses from tariff.

Question 5

Equilibrium in a pure specific-factors model

Answer 5

North: LN workers, KN units of capital.

Perfect competition, so nominal wages equal to the value of the marginal product of labor:

w^N = p^C MPL^C(L^N, K^N).

→ factor prices will adjust so that demand for labor and capital equals (the fixed) supply.

Similar for the price of capital services:

r^N = p^C MPK^C(􏰃L^N, K^N).

Question 6

The impact of a tariff in a pure-specific-factors model

Answer 6

Assume that the US market is relatively small, so that p^C and p^T are determined on world markets.

Then a 50% tariff on C will increase p^C by 50%. Both w^N and r^N increase by 50% when p^C increases by 50%.

Therefore, both workers and capitalists in the North benefit from the tariff.

Neither w^S nor r^S increases because of the tariff, since p^T is unchanged. (Why is pT unchanged?). Therefore, Southern factors’ nominal incomes are unchanged, even as the price of cloth goes up.

Real incomes of owners of Southern factors fall due to the tariff.

Question 7

An unrealistic feature of the pure specific-factors model

Answer 7

• When tariff goes up, what happens to the allocation of labor to the cloth industry? Nothing.
• Therefore, what happens to output in the cloth industry? Nothing.

Question 8

The Ricardo-Viner model

Answer 8

Mixed Specific-Factors Model
Labor mobility. Capital/land still fixed.

• A single wage w for the whole country
• r^s and r^N still different

Equilibrium given by:

p^CMPL^C(L^C, K^C) = w

p^TMPL^T(L^T, K^T) = w

L = L^C + L^T

Question 9

Equilibrium in the Ricardo-Viner model / Mixed Specific-Factors Model

Answer 9

Equilibrium given by:

p^CMPL^C(L^C, K^C) = w

p^TMPL^T(L^T, K^T) = w

L = L^C + L^T

Question 10

The Ricardo-Viner model: Capital income

Answer 10

• Area under p^CMPL^C curve equals p^CQ^C
• Subtract wage bill, wL^C, to get income to Northern capitalists

Question 11

The Ricardo-Viner model: Effects of tariff

Answer 11

• Shifts the pC MPLC curve up everywhere proportionally (by 50%).
• Wage w goes up.
• L^C goes up, L^T goes down. Q^C goes up, Q^T goes down.

Cloths:
Workers & capitalists gain nominally

Tobacco:
Workers gain, land owners lose, nominally

Suppose w increased by 50%. Then, weages goes up by less than 50 %.

Question 12

The Ricardo-Viner model:

Effects of tariff to workers’ budget lines

Answer 12

w has increased because of the tariff; but w/p^C has fallen because of the tariff. This is the cloth intercept of the workers’ budget line.

Since pT is unchanged, w/pT has risen due to the tariff. This is the tobacco intercept of the workers’ budget line.

Question 13

The Ricardo-Viner model:

Effects of tariff: Income of Northern capitalists

Answer 13

Recall that

r^N = p^CMPK^C(􏰃L^N, K^N)

We have p^C ↑ by 50% and MPK^C􏰂 ↑, hence r^N up by more than 50%.

Real capital income r^NK^N/p^C and r^NK^N/p^T also rises.

Question 14

The Ricardo-Viner model:

Effects of tariff: Income of Southern landowners

Answer 14

Land income is

r^SA^S = p^TQ^T − wL^T

• Sales down and wage costs higher → nominal land income down.
• Then, r^SA^S/p^T and r^SA^S/p^C also down.
• Budget line shifts in.

Question 15

The Ricardo-Viner model:

Factors _____ are unambiguously hurt by the tariff.

Answer 15

The Ricardo-Viner model:

Factors specific to the export sector are unambiguously hurt by the tariff.

Question 16

The Ricardo-Viner model:

Factors _____ unambiguously benefit from the tariff.

Answer 16

Factors specific to the import-competing sector unambiguously benefit from the tariff.

Question 17

A full trade model

Answer 17

• Introduce a second country with differences in productivity
• Drop the small economy assumption => prices endogenous

Question 18

Autarky vs. a full trade model:

RS- & RD-curve

Answer 18

• As before, wages equals the marginal product of labor in each sector
• This must mean that L^C/L^T is (an increasing) function of p^C/p^T.
• This must mean that Q^C/Q^T is (an increasing) function of p^C/p^T => RS curve

Autarky:

• 􏰀 Europe RS curve to the right of US RS curve.
• 􏰀 Identical RD curve → p^C/p^T lower in Europe.

Trade:

• p^C/p^T must rise in Europe.
• 􏰀Supply > Demand → Exports of C from Europe.

Question 19

Aggregate welfare in autarky vs full trade model: Europe

Answer 19