Specific Factor model

Question 1

What is the starting point (assumptions) in specific factors model?

Answer 1

• Three factors of production: Labour: L (free, mobile), Land: S (sector specific) and Machinery: M (sector specific)
• Two goods: Agriculture = f (L, S), Manufactures: f (L, M)
• ## This shows short run equilibrium since S and M are fixed.

Question 2

How will the production function look both for the output and marginal product of labour?

Answer 2

The function of output will have diminishing returns to scale since since the specific factors are fixed, meaning that the increase in labour won’t make as big of a diffrence.

The marginal product of labour decreases,

Question 3

What is the function for nominal wage in the specific factors model?

Answer 3

w(M) = P(M)MP(M) = VMP(LM) = VMP(LA) = P(A)MP(LA)

Since wage if free, is has to be same wage between sectors.

Question 4

What does VMP mean?

What determines VMP(L) curves?

Answer 4

Value of marginal product= Price * MP
Curves determined by: 
- Price of good,
- How much sector specific factor is available
- Production technology

Question 5

What does the Labour market equilibrium show?

Answer 5

It shows VMP(LM) and VMP(LA). Depending on their VMP levels, they will intersect in diffrent places.
The equilibrium is VMP(LM)=VMP(LA) and this shows the distrubution of labour in each sector.

Equilibrium is where the wages will be the same.

Question 6

What happen to a VMP(L) curve if the price rises?

Answer 6

since VMP(L)= P*MP(L), that will lead to VMP(L) increasing. This will mean that there is an increase in real return for the SPECIFIC FACTOR in that sector. 
Real return decrease in the other specific factor in other sector. 
This will lead to new equilibrium being higher than before as well as more labour going to the successfull sector. This will lead to the factor ratios changing
This affects the maginal products of the factors of production-> real return changes

Question 7

What are the diffrences between H-O model and Specific factors model regarding price changes on real returns

Answer 7

H-O: effects of price changes on real returns are determined by factor intesities. Coice of changing intensities.
Specefic factors: Effects on price changes on real returns are determined by factor mobility. Not choice to change intensities, it happens organically through labour mobility.

H-O imples internal conflict between scarce and abundant factors, Specific factors offer a new perspective

Question 8

How can you say trade patterns would look in the specefic factors model?

Answer 8

Not so clear:
- If countries have endowment in mobile factor, each country will export the good produced with the absolutely abundant stock of specefic factor and import the other