4. Specific Factors and Income Distribution

Question 1

List the advantages of the Ricardian Model.

Answer 1

• Simple demonstration of comparative advantage.
• Simple demonstration of the gains from trade.
• Reasonably good at predicting the patter of trade in practice.

Question 2

List the disadvantages of the Ricardian Model.

Answer 2

• Biggest disadvantage: cannot address the effects of trade on the distribution of income.
• Does not explain the source of comparative advantage.

Question 3

List the assumptions of the Specific Factors Model.

Answer 3

1. There are three factors of production (Land: specific to the food sector, Capital: specific to the manufacturing sector, and Labor: intersectorally mobile).
2. Perfect competition
3. Constant Returns to Scale
4. Diminishing Marginal Returns
5. Production functions
   
   1. Qm = Qm (K, Lm) Qf = Qf (K, Lf)

Question 4

Draw and label the PPF for manufactures.

Answer 4

Notice the curve demonstrates diminishing returns to scale.

Question 5

Describe the difference between Deminishing Marginal Returns and Constant Returns to scale.

Answer 5

Constant Returns to Scale: applies to the scale of production. If I have one acre of land and I add a second acre of land, I will double my output.

Deminishing Marginal Returns: applies to the current resources. as you add more and more labor to your current supply of land, your increase in production will increase by less and less.

Question 6

Draw and lable the Marginal Product of Labor Curve.

Answer 6

Question 7

Draw and label the PPF for the Specific Factors Model

Answer 7

Question 8

What is the respons of output to a change in the Relative Price of Manufactures?

Answer 8

An increase in the relatvie price of manufactures makes the GDP line (tangent line, slope of -(Pm/Pf) steeper (shift from point 1 to point 2). Firms produce more manufactures and less food.

Question 9

How do you find the Relative Prices?

Answer 9

Question 10

• Assume two countries (A and J)
• Assume they are identical in every respect except:
  
  • A has more land
  • J has more capital
• A has 1. _________ (steeper, less steep) PPF than J
• A has 2. ________ (lower, higher) relative supply of manufactures than J (i.e., RS is further to the 3. ______ (left, right))

Answer 10

1. steeper – the opportunity cost
2. lower relative supply

Question 11

Why is country A’s PPF curve steeper than J’s

Answer 11

Because country A has more land and has a lower relative supply of manufactures than J. Consequently, when both countries have the same relative prices, each country will export more of the good that uses its abundant factor

Question 12

When the Free trade relative manufactures of food is in between the two autarky prices of countries A and J, and country A has an abundance of land while country J has an abundance of Capital, how will the two autary prices shift?

Answer 12

Country A’s experiences a decrease in the relative price of manufactures and J experiences an increase in the relative price of manufactures.

Question 13

In the specific factors model, what is the source of comparative advantage?

Answer 13

It is due to different endowments (i.e. amount of land or capital). There are no differences in technologies.