Chap 5

Question 1

Question 2 type

In pure specific-factor model, suppose a wave of FDI to USA, increasing the capital available in the cotton sector.

How would that effect the distribution of income in USA? (North- cotton and south - Tabacco)

Answer 1

• The FDI increase the MPLc, raising the wages (in cotton industry)
• The FDI would reduce the MPK, reducing the income of capital owner in the sector

consequently, the real income of the owner fall , the real income of the worker rise

• South is not affected

Question 2

Question 2 type

In mixed specific-factor model, suppose a wave of FDI to USA, increasing the capital available in the cotton sector.

How would that effect the distribution of income in USA? (North- cotton and south - Tabacco)

Answer 2

• This wave of FDI would increase the MPL in the sector.
• This would increase the wage in both industries, Increasing employment in the cotton sector would reduce it in the tobacco sector
• Since prices are unchanged, real wage would increase for everyone
• The income of both capital owners would fall because wage go up without change in output prices.

Question 3

Identify an occupation that require sector-specific or other that not.

Do these difference in the mobility of skills change the way workers in both occupations are likely to be affected by a reduction of tariffs ?

Answer 3

• Sector specific
• It will be affected if it have to compete with external trade but also can gain from it
• Non sector specific:
• If the sector is highly mobile it would be indifference to it.

Question 4

Question 3 type (Brazil example)

In a pure specific-factor economy

What would happens to wages if a industry tariff change?

Answer 4

• The key equation is the one that show the wages in each sector to the productivity of the prices and MPL in that sector.
• The MPL in each sector is FIXED because all factors of productions are STUCK in that sector
• therefore, change in sector wages is proportional to changes in domestic output price

Question 5

Question 3 type (Brazil example)

In a mixed specific-factor economy

What would happens to wages if a industry tariff change?

Answer 5

• The key point is that wages is always the same across industries
• Changes in wages happens all at ones (all industries)

Question 6

What is Pure specific factor ?

Answer 6

• Every factor is specific to some industry

Question 7

what is Mixed specific factor?

Answer 7

• At least one factor is mobile

Question 8

Formula for wages:

Answer 8

p x MPL (L/K) = w

• p :price
• MPL :marginal product of labor
• L: labor
• K: capital
• w : wage

Question 9

formula for CRS or quantity :

Answer 9

Qx = fx ( Lx , Ny )

Qx: quantity of x product
fx:
L: labor
K:capital

Question 10

total labor formula:

Answer 10

Lx + Ly = L

Lx labor of x industry
Ly labor of y industry
L: total labor

Question 11

What is a specific factor ?

Answer 11

• It is factor of production that cannot be relocated from one industry to another

Question 12

Generally what happens with factor specific industries with trade liberalization ?

Answer 12

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