Topic 3: The Specific Factors Model

Question 1

Two main reasons why international trade has strong effects on the distribution of income within a country:

Answer 1

– Resources cannot move immediately or without cost from one industry to another
– Industries differ in the factors of production they demand

Question 2

The specific factors model allows trade to affect ……..
distribution across countries

Answer 2

income

Question 3

Using the specific factors model we can explain:

Answer 3

• How a mobile factor will respond to price changes by moving
  across sectors.
• Why trade will generate both winners and losers in the short
  run.
• Understand the meaning of gains from trade when there are
  losers.
• The reasons why trade is a politically contentious issue.

Question 4

…….. is a mobile factor that can move
between …….

Answer 4

labour/sectors

Question 5

…. and ……. are both specific factors used only in the production of one good

Answer 5

Land/Capital

Question 6

How does the economy’s mix of output
change as labour is shifted from one sector to
the other (cloth)?

Answer 6

When labour moves from food to cloth, food
production falls while output of cloth rises

Question 7

The production function for cloth gives the
…….. of cloth that can be produced given
any input of …….. and labour:
Qc = Qc(K, Lc)

Answer 7

quantity/capital

Question 8

The production function for food gives the
…….. of food that can be produced given
any input of …. and labour:
QF = QF (T, LF)

Answer 8

quantity/land

Question 9

The shape of the production function reflects the … .. ………… ……… ……..

Answer 9

law of diminishing marginal returns

Question 10

Adding one worker to the production process
(without increasing the amount of capital) means
that each worker has less capital to work with. Therefore:

Answer 10

Therefore, each additional unit of labour adds less
output than the last

Question 11

The Marginal product of Labour

Answer 11

The marginal product of labour is the increase in output that corresponds to an extra unit of labour

Question 12

Why is the production possibilities frontier
curved?

Answer 12

– Diminishing returns to labour in each sector cause the opportunity cost to rise when an economy produces more of a good

Question 13

Opportunity cost of producing one more yard of
cloth is MPL_f/MPL_c pounds of ….

Answer 13

food

Question 14

Demand for labour: in each sector, employers will maximise profits by demanding labour up to the point where the value produced by an additional
…. equals the marginal cost of employing a worker for that ….

Answer 14

hour

Question 15

The two sectors must pay the same wage because …….
can …. between sectors

Answer 15

labour/move

Question 16

If the wage were higher in the cloth sector, workers would move from making food to making cloth until the wages become …..

Answer 16

equal

Question 17

Where the labour demand curves intersect gives the
……………. …. and allocation of labor between
the two sectors

Answer 17

equilibrium wage

Question 18

Trade …….. a country by expanding choices

Answer 18

benefits

Question 19

Without trade, the economy’s output of a
good must ….. its consumption

Answer 19

equal

Question 20

Opening up to trade ………. the relative price of
cloth in an economy whose relative supply of
cloth is larger than for the world as a whole

Answer 20

increases

Question 21

Free trade relative price of cloth is determined by
the intersection of ….. relative supply of cloth
and ….. relative demand

Answer 21

world

Question 22

A higher relative price of cloth will lead to
an …….. in the output of cloth relative
to that of food

Answer 22

increase

Question 23

Movements in factors of production include

Answer 23

– labour migration
– the transfer of financial assets through international borrowing and lending transactions of multinational corporations involving direct ownership of foreign firms

Question 24

The value of world output is maximised when the …….. ………… .. …….. is the same across countrie

Answer 24

marginal productivity of labour

Question 25

International trade often has strong effects on the distribution of income within countries – produces …… as well as ……..

Answer 25

losers/winners

Question 26

Income distribution effects arise for two
reasons:

Answer 26

– Factors of production cannot move without cost and quickly from one industry to another
– Changes in an economy’s output mix have differential effects on the demand for different factors of production

Question 27

Those …. by trade are often better organised than those who gain, causing trade restrictions to be adopted

Answer 27

hurt

Question 28

Real wages fall due to ……….. and rise due to
………..

Answer 28

immigration/emigration

Question 29

To increase cloth output by one unit, we must increase labor input by:

Answer 29

1/MPL_c hours

Question 30

The demand for labor in each sector depends on: … …… .. ……….. …. …. …. …..

Answer 30

the price of output and the wage rate.

Question 31

the wage rate depends on the …………. ………. for labor by food and cloth producers.

Answer 31

combined demand