International Economics

Chapter3 The Specific Factor ModelChapter3 The Specific Factor Model

Main Contents

The Specific Factors Model

International Trade in the specific Factors

Model

The Political Economy of TradeThe Political Economy of Trade

Key Terms

Budget constrains production function

Diminishing returns mobile factors

marginal product of labor specific factors

production possibility frontier

Specific factors model

Ⅰ. The Specific Factors Model

ⅰ. Assumptions of the model

Two goods:

manufacture

food

Three factors: Capital(C) Labor(L)

Land(L)

The specific factor in producing manufacture

The specific factor in producing food

The production function for manufactures:

QM=QM(K,LM)

The production function for foods:

QF=QM(T,LF)

LM: the labor used in manufactures

LF: the labor used in foods

Obviously, LM +LF= L

ⅱⅱ. . Production possibility FrontierProduction possibility Frontier

MPLM

MPLM

LM

MPLF

MPLF

LF

The production curves

QMQM=QM(K,LM)

LM

QF

QF=QF(K,LF)

LF

The resources restriction lineThe resources restriction line

LM

L

L LF

450

Production Possibility Frontier (PPF)Production Possibility Frontier (PPF) QF

QF=Q(T,LF)

QM

1`2`

3`

12

3

LF

LM

QM=Q(K,LM)

Slope of PP curve=-- MPLF /MPLM

The difference between the Ricardo Model and the Specific Factors Model: P43

QF

PPF

QM

ⅲⅲ. . Prices, Wages and Labor AllocationPrices, Wages and Labor Allocation

MPLM ------falls downward because of

diminishing returns

MPLM*PW ------falls downward accordingly

W------falls downward synchronously

wPMPL FF

wPMPL MM

The equilibrium of the labor marketThe equilibrium of the labor market

MPLM× PMMPLF× PF

w`

LM` LF`

total labor supply, L

LM LF

wPMPLPMPL FFMM

FMMF PPMPLMPL //

At point E,

That is to say,

At the production point the PPF must to be tangent to a line whose slope is minus the price of manufactures divided by that of food.

Production in the Specific Factors ModelProduction in the Specific Factors Model

QF

QM

slope=-(PM/PF )1 1 Q1F

Q1M

PPF

Prices changes and the distribution of Prices changes and the distribution of laborlabor

(1)An equal proportional change in prices

PM :+10% PF :+10% w: +10%

(2)A change in relative prices

PM :+10% PF:unchanged

w: rises by less than 10%

P2F*MPLF P1

F*MPLF

P1M*MPLM

P2M*MPLM

W2

W1

LM LF

2

1+10%

W

2

1

P1F*MPLF

P1M*MPLM

P2M*MPLM W2

W1

LM LF

+6%

W

ⅳⅳ. Relative Prices and the Distribution . Relative Prices and the Distribution of Income of Income

Suppose,

PM rises 10%, w rises 5%(< 10%).

Workers: w/ PM falls, w/ PF rises

The effects on workers are uncertain.

Owners of capital:

w/ PM falls, then the cost fall;

PM rises, PM / PF rises too, then the

purchasing power rises.

The welfare of them is better off.

Owners of land:

w/ PF rises, the costs rises;

PM rises, PM / PF rises too, then the

purchasing power falls.

The welfare of them is worse off.

How about the case if PM

drops 10% and PF remains unchanged?

Ⅱ. International Trade in the specific

Factors Model

Suppose,

Japan: abundant in capital

America: abundant in land

The pattern of tradeThe pattern of trade

Japan produces and exports capital-intensive

goods------manufactures

(PM/PF)J relatively low

America will produce and export land-

intensive goods------food

(PM/PF)A relatively high

PPMM/P/PFF

(PM/PF)A

(PPMM/P/PF F )W

(PM/PF)J

RSRSAA

RSRSWW

RSRSJJ

QM /QF

RDRDWW

The welfare effects of international tradeThe welfare effects of international trade

America: (PM/PF)A falls.

The owners of capital: worse off;

The owners of land: better off;

The owners of labor(workers): uncertain

(PM/PF)A (PM/PF)W (PM/PF)J

The welfare effects of international tradeThe welfare effects of international trade

Japan: (PM/PF)J rises.

The owners of capital: better off;

The owners of land: worse off;

The owners of labor(workers): uncertain

(PM/PF)A (PM/PF)W (PM/PF)J

The general outcome:P55

Trade benefits the factor that is specific to the export sector of each country but hurts the factor specific to the import-competing sectors, with ambiguous effects on mobile factors.

ⅢⅢ. . The Political Economy of TradeThe Political Economy of Trade

ⅰⅰ. . Lobbying power and trade policiesLobbying power and trade policies

?? ??? ??

C

B

B,C

MB

MC

TT*

B: benefit of lobby

C: cost of lobby

A cost-benefit model with two benefit groups

PPPP CGR

producers

)/(：

Average net benefit

Producers’ surplus

Production scale

Political cost

CCCC CGR

consumers

)/(：

CP

CP

， protectionlism

， free trade

Import quota Import quota

on sugaron sugar

Producers loss about 1.5 billion dollars per year

Consumers gain about 2 billions dollars per year

ⅱⅱ. . The theoretical support of protection- The theoretical support of protection-

ismism

1. The Second Best Theory1. The Second Best Theory ① ① J. Viner: J. Viner:

The Customs Union Issue 1950The Customs Union Issue 1950

②② J.E.Meade Graphic example 1955J.E.Meade Graphic example 1955

③③ R.G.Lipsey and K.Lancaster R.G.Lipsey and K.Lancaster

Generalize 1956Generalize 1956

H

t

A

B

CD

E

2.Game between nations -----prisoner’s dilemma

(5years, 5years) (5years, 3months)

(3months, 5years) (1years, 1years)

J

A

Free trade protection

Free trade +10

+10

+20

--10

protection --10

+20

--5

--5

ⅲⅲ. The reasons that most economists . The reasons that most economists

remain strongly in favor of more or lessremain strongly in favor of more or less

free trade?free trade?

P58 1.2.3P58 1.2.3

1.If Australia has relatively more land per worker, and Belgium has relatively more capital per worker, then if trade were to open up between these two countries, A. the relative price of the capital-intensive product would rise in Australia. B. the world price of the land-intensive product would be higher than it had been in Belgium. C. the world price of the land intensive product would be higher than it had been in Australia. D.the relative price of the land intensive product would rise in Belgium. E.None of the above.

Answer: C

2. If Australia has more land per worker, and Belgium has more capital per worker, then if trade were to open up between these two countries, A. Australia would export the land-intensive product. B. Belgium would import the capital-intensive product. C. Both countries would export some of each product. D. trade would not continue since Belgium is a smaller country. E.None of the above.

Answer: A

3. If Australia has more land per worker, and Belgium has more capital per worker, then if trade were to open up between these two countries, A. the real income of capital owners in Australia would rise. B. the real income of labor in Australia would clearly rise. C. the real income of labor in Belgium would clearly rise. D. the real income of landowners in Belgium would fall. E. the real incomes of capital owners in both countries would rise.

Answer: D

Essay Questions

In 1986, the price of oil on world markets dropped sharply. Since the United States is an oil-importing country, this was widely regarded as good for the U.S. economy. Yet in Texas and Louisiana, 1986 was a year of economic decline. Why?

Answer: The major exporting industry located in these two States is Oil extraction and refining. Since the factors of production specific to the oil industry could not shift out of them smoothly and quickly, their real income suffered.