Specific-Factors Model

Question 1

How does the Specific-Factors Model differ substantially from the Ricardian Model?

Answer 1

1. Unlike the Ricardian Model, it recognises that there are both mobile factors of production and specific factors of production
2. The production possibility frontier is a curved line with diminishing returns to labor, due to the added factors of production.

Question 2

What is a specific factor?

Answer 2

A factor of production that can only be used in one sector

Question 3

In each sector of a specific factors​ economy, profit-maximizing employers will demand labor up to the point where…

Answer 3

the marginal product of labor times the price of the product equals the wage rate.

Question 4

In international trade, why does income distribution effects arise?

Answer 4

1. Factors of production cannot move instantaneously and costlessly from one industry to another.
2. Changes in an economy’s output mix have differential effects on the demand for different factors of production.

Question 5

In the Specific-Factors Model, what “factors” win and lose in international trade?

Answer 5

Winner: factors specific to export sectors
Loser: factors specific to import-competing sectors
Undetermined: mobile factors

Question 6

What is the fundamental reason that trade potentially benefits a country?

Answer 6

Trade expands the economy’s choices. This means that it is always possible to redistribute income, such that everyone gains from trade