specific factors 3 Flashcards
why is there opposition to trade?
resources and goods cannot move instantly and incur transportation costs
industries differ in the factors of production they may demand
political influence. may restrict trade to aid key swing states or reflect ideologies
income distribution will be affected
what are the key assumptions of the specific factors modelw21
an economy has 2 goods and can allocate labour between the 2 sectors
3 factors labour capital and land
perfect competition prevails
- Cloth produced using capital and labor (but not land).
- Food produced using land and labor (but not capital).
- Labor is a mobile factor that can move between sectors.
- Land and capital are both specific factors used only in the production of one good.
why are production possibility frontiers sloped?
as the economy produces more of one good the opportunity cost for the other becomes greater as different industries have differing factors in production and the cost becomes greater as we shift more focus toward one industry ignoring the other
in the specific factors model, what does an increase in the price of cloth mean for wages and income?
th real wage for Lc will decrease as more workers influx the industry meaning capitalists gain whereas the real wage for food Lf increases
wages as a whole rise less than the increase in just cloth (hence real wage decrease in terms of buying cloth, whereas in terms of buying food it has increased)
can everyone gain from trade?
in ricardian yes. in specific factors no.
technically redistribution of wealth is possible its just unlikely and hard to implement
wy do income distribution effects happen
Factors of production cannot move costlessly and quickly from one industry to another
changes in an economies output mix has affects on other demands for factors in production
what happens when labor moves to the higher wage good?
wages will eventually equalise as the marginal products of labour will eventually come back to equillibrium
where is the production point on a ppf in specific factors model
must be a line that is tangent to the curve with a slope of -mplc/mplf or -pc/pf
if cloth rises what happens to our three groups (workers, capital owner land owner)
workers - wage increase less than that of price increase
capital owners increase wealth as real wage doesn’t keep up with price
land owners lose out as their real wage has increased and profit margins slimmed
how does international trade shift jobs?
shifts from imprt competing industries to export as countries specalise
is unemployment related to trade?
no empirical evidence
how does growth affect the ppf in one good
expands in that goods favour leaving the other untouched
