4 - SPECIFIC FACTORS MODEL Flashcards
WHAT IS A SPECIFIC FACTOR?
A specific factor is a resource tied to a particular industry and not easily moved. Examples include land for farming and capital for manufacturing.
WHAT ARE THE ASSUMPTIONS OF THE SPECIFIC FACTORS MODEL?
The model assumes two goods (cloth and food) and three factors of production (labor, capital, and land).
Labor is mobile between industries, but capital and land are specific to their respective sectors.
WHAT IS THE PRODUCTION POSSIBILITIES FRONTIER (PPF) IN THIS MODEL?
The PPF shows the trade-off between producing two goods, cloth and food.
It is concave due to diminishing returns in both industries, with the slope representing the opportunity cost.
HOW DO PRICES, WAGES, AND LABOR ALLOCATION INTERACT IN THIS MODEL?
Labor demand in each sector depends on the price of output and the wage rate.
Labor shifts between sectors to equalize wages, leading to an equilibrium where labor demand matches the total labor supply.
HOW DOES A CHANGE IN RELATIVE PRICES AFFECT LABOR ALLOCATION?
If only the price of cloth increases, labor shifts towards the cloth sector, increasing cloth output and reducing food output.
A proportional increase in both goods’ prices raises wages but leaves the real wage unchanged.
WHAT ARE THE INCOME DISTRIBUTION EFFECTS OF TRADE IN THIS MODEL?
Trade benefits the factor specific to the export sector (e.g., capital owners in cloth) and hurts the factor specific to the import-competing sector (e.g., landowners in food).
Mobile factors like labor experience ambiguous effects.
WHAT IS THE BUDGET CONSTRAINT IN THE SPECIFIC FACTORS MODEL?
The economy’s imports must be paid for by exports. The slope of the budget constraint reflects the relative price of cloth to food (-PC/PF).
WHAT ARE THE AGGREGATE GAINS FROM TRADE?
Trade allows a country to consume more of both goods than it could in autarky, leading to aggregate gains.
However, the distribution of these gains creates winners and losers within the country.
WHAT DOES THE MODEL SAY ABOUT INTERNATIONAL LABOR MOBILITY?
Workers migrate from low-wage to high-wage countries, leading to wage equalization.
Migration increases global productivity but also creates winners (e.g., migrants) and losers (e.g., workers in the receiving country facing lower wages).
WHY DOES TRADE CREATE WINNERS AND LOSERS ACCORDING TO THIS MODEL?
Because specific factors cannot move across sectors, their returns are affected differently by trade.
The factor specific to the sector whose relative price increases gains, while the one specific to the sector whose price falls loses.
Labor, being mobile, experiences ambiguous effects.
