Ch 3 - Specific Factors Flashcards
Why is the model called specific-factors model?
land is specific to the agriculture sector, capital is specific to the manufacturing sector, and labor is used in both
What question is addressed in the specific factors model?
How does trade (changes in relative prices) affect the earnings of land, labor, and capital?
Diminishing returns
marginal product of labor declines as the amount of labor used in the industry increases
How do economists measure gains from trade?
they determine how much extra consumption a country can afford by (1) looking at the price increases for exports and the price decreases for imports and (2) knowing the value consumers place on imported goods compared to domestic substitutes
How does the specific factors model differ from the Ricardian model?
(1) while there are aggregate gains from trade, not everyone gains; (2) there is incomplete specialization so both goods are produced; (3) the opening of trade and shift in relative prices raise the real wage in terms of one good but lower it in terms of another
Trade embargo
a complete stop to all trade
Which countries tend to have the highest gains from trade?
countries with the highest ratios of trade to GDP (typically countries with smaller economies)
Engel’s Law
poor individuals spend a greater share of their income than rich individuals on food
What does rental on capital and rental on land mean?
what these factors earn during a period when they are used in manufacturing and agriculture OR the amount they could earn if they were rented to someone else over that time
What happens when the relative price of an industry’s output increases?
(1) real rental earned by the factor specific to that industry increases; (2) real rental earned by the factor specific to the other industry decreases; (3) an ambiguous effect on the real income of labor (depends on how much of each good is consumed)
