Topic 3: The Specific Factors Model Flashcards
Two main reasons why international trade has strong effects on the distribution of income within a country:
– Resources cannot move immediately or without cost from one industry to another
– Industries differ in the factors of production they demand
The specific factors model allows trade to affect ……..
distribution across countries
income
Using the specific factors model we can explain:
- 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.
…….. is a mobile factor that can move
between …….
labour/sectors
…. and ……. are both specific factors used only in the production of one good
Land/Capital
How does the economy’s mix of output
change as labour is shifted from one sector to
the other (cloth)?
When labour moves from food to cloth, food
production falls while output of cloth rises
The production function for cloth gives the
…….. of cloth that can be produced given
any input of …….. and labour:
Qc = Qc(K, Lc)
quantity/capital
The production function for food gives the
…….. of food that can be produced given
any input of …. and labour:
QF = QF (T, LF)
quantity/land
The shape of the production function reflects the … .. ………… ……… ……..
law of diminishing marginal returns
Adding one worker to the production process
(without increasing the amount of capital) means
that each worker has less capital to work with. Therefore:
Therefore, each additional unit of labour adds less
output than the last
The Marginal product of Labour
The marginal product of labour is the increase in output that corresponds to an extra unit of labour
Why is the production possibilities frontier
curved?
– Diminishing returns to labour in each sector cause the opportunity cost to rise when an economy produces more of a good
Opportunity cost of producing one more yard of
cloth is MPL_f/MPL_c pounds of ….
food
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 ….
hour
The two sectors must pay the same wage because …….
can …. between sectors
labour/move
If the wage were higher in the cloth sector, workers would move from making food to making cloth until the wages become …..
equal
Where the labour demand curves intersect gives the
……………. …. and allocation of labor between
the two sectors
equilibrium wage
Trade …….. a country by expanding choices
benefits
Without trade, the economy’s output of a
good must ….. its consumption
equal
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
increases
Free trade relative price of cloth is determined by
the intersection of ….. relative supply of cloth
and ….. relative demand
world
A higher relative price of cloth will lead to
an …….. in the output of cloth relative
to that of food
increase
Movements in factors of production include
– labour migration
– the transfer of financial assets through international borrowing and lending transactions of multinational corporations involving direct ownership of foreign firms
The value of world output is maximised when the …….. ………… .. …….. is the same across countrie
marginal productivity of labour
International trade often has strong effects on the distribution of income within countries – produces …… as well as ……..
losers/winners
Income distribution effects arise for two
reasons:
– 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
Those …. by trade are often better organised than those who gain, causing trade restrictions to be adopted
hurt
Real wages fall due to ……….. and rise due to
………..
immigration/emigration
To increase cloth output by one unit, we must increase labor input by:
1/MPL_c hours
The demand for labor in each sector depends on: … …… .. ……….. …. …. …. …..
the price of output and the wage rate.
the wage rate depends on the …………. ………. for labor by food and cloth producers.
combined demand
